Endowment Effect - Noisy Affiliated Utility

WTP-WTA gaps, the endowment effect, and status quo bias are among the most influential and discussed findings in behavioural economics. Under certain conditions -- ones in which a winner's curse might arise -- rational traders should have WTP-WTA gaps. Such gaps could be caused by people's beliefs (correct or incorrect) that they are operating under these conditions. I present a model that shows how these conditions lead to gaps and makes predictions about how magnitude of gaps should differ: that they are larger where value is uncertain and trading partners are similar (similar in relation to the good). I conduct an experiment with buyers and sellers and measure the WTP-WTA gaps. In one treatment participants trade with another participant (similar trading partner), in another they trade with the experimenter who will return the goods to the shop if they are left at the end of the experiment (dissimilar trading partner). The theory predicts that the former treatment will have larger WTP-WTA gaps than the latter. Participants trade goods and lotteries. The lotteries differ according to how complicated they are. The theory predicts that more complicated lotteries will have larger gaps. In the first stage of the experiment, participants trade mugs. In the second stage there are 14 rounds with different goods, one of which will be implemented. In the third stage there are 16 lotteries, one of which will be implemented. In the survey I ask the participants for their value confidence intervals. That is, the minimum and maximum values between which they are 95% confident that the personal value of the good to them lies.