The Endowment Effect and Strategic Behavior in Repeated Procurement Auctions. Implications for Payment for Ecosystem Services Schemes

We use an experimental methodology to examine whether bidding behavior in repeated procurement auctions can be explained by a diminishing endowment effect and an increase in strategic behavior over time. Prospect theory tells us that the loss aversion associated with an endowment leads to asymmetries in valuation and exchange behavior. Experience with market mechanisms reduces the endowment effect (List, 2003), while the likelihood of strategic behavior increases with repetition. We hypothesize that by studying the dynamics of these two effects we can determine an optimal number of rounds (i.e. at least cost for the auctioneer) in repeated procurement auctions. An application can be found in the procurement of agri-environmental benefits.