Book Description

A higher endowment of some good will typically cause an individual to place a lower value on increases (or decreases) in that endowment. This property, which we call diminishing marginal value, is a pervasive component of economists' beliefs about people's behavior. In ordinary markets "the more one consumes of something, the less one is willing to pay to obtain more of it," as Robert Frank recently wrote (as a contrast to the market for Harry Potter books). "Even a hungry person would be willing to pay less for a second sandwich than for the first." As a behavioral property, diminishing marginal value (DMV) is relatively difficult to observe with market data, but it is straightforward to observe it through experiments. This paper measures DMV in experiments with two ordinary goods, mugs and flashlights. Subjects were given different numbers of mugs or flashlights and asked the compensation they required to relinquish one or more of them. DMV means that someone who starts with four mugs will require lower compensation to give upone mug than someone who starts with three mugs, for example. We report the results of thirteen real-money experiments conducted with over 400 mostly non-student subjects. We test whether the average compensation demanded (i.e., willingness-to-accept) to give up a specified number of flashlights (or mugs) is lower among subjects whose endowment of that good is higher. The evidence we find for diminishing marginal value is strong. Of eleven possible comparisons, all show a decrease in the valueof the items as the endowment increased. Decreases in compensation demanded ranged from 12 to 26 percent as the endowments we studied increased. All subjects in any given experiment had exactly the same endowment and had no knowledge of other possible endowments. Therefore, any difference in reported values is likely to reflect only the endowment's effect on marginal value and will not be confounded by other features, such as envy or concerns about fairness.