Experimental Tests of the Endowment Effect and the Coase Theorem

The standard assumptions of economic theory imply that when income effects are small, differences between an individual's maximum willingness to pay for a good (WTP) and minimum compensation demanded for the same entitlement (willingness to accept or WTA) should be negligible. Thus, indifference curves are drawn without reference to current endowments, any difference between equivalent and compensating variation assessments of welfare changes are in practice ignored, and there is wide acceptance of the Coase Theorem assertion that, subject to income effects, the allocation of resources will be independent of the assignment of property rights when costless trades are possible.