Economics Endowment Effect Questions Medium
Endowment heterogeneity refers to the variation in individuals' initial endowments or possessions. In the context of the Endowment Effect, it suggests that people value their own possessions or endowments more than identical goods or resources that they do not own.
The Endowment Effect is a cognitive bias where individuals tend to place a higher value on an object they own compared to the same object when they do not own it. This bias leads to a discrepancy between the willingness to accept (WTA) a price to sell an object and the willingness to pay (WTP) that same price to acquire it.
Endowment heterogeneity plays a crucial role in the Endowment Effect because it influences individuals' perception of the value of their possessions. When people have different initial endowments, they attach different subjective values to those possessions. This variation in subjective valuation creates a disparity in the WTA and WTP for the same object.
For example, if two individuals are given identical mugs as a gift, one person may value the mug at $10, while the other person may value it at $15. Due to endowment heterogeneity, the person valuing it at $15 would be less willing to sell the mug for $10, as they perceive its value to be higher. On the other hand, the person valuing it at $10 may be willing to buy an identical mug for $10, as they do not have the same attachment to it.
Endowment heterogeneity highlights the subjective nature of value and the influence of ownership on individuals' preferences. It suggests that people's attachment to their possessions is not solely based on the objective characteristics of the item but also on their personal connection and perception of its value.