Ambiguity Aversion and Value Uncertainty Generates an Endowment Effect

We propose a new explanation of the endowment effect. The value of exchanged goods is uncertain. Specifically, the value is assumed to be ambiguous, represented by a set of probability distributions over possible values. Ambiguity averse agents (maxmin expected utility maximisers) set WTA and WTP below expected value. Ambiguity is typically lower for the seller who tends to have more knowledge of the object. Hence WTA tends to be higher than WTP, which constitutes the endowment effect. The model can account for the facts that the endowment effect is decreased by physical contact with the good, decreasing in experience, larger for non-market goods, and more dependent on possession of the good rather than ownership. Loss aversion can also be derived from the model