Document Type

Article

Publication Date

January 2010

Abstract

In this article we report on the results of an experiment we performed to determine whether transactions in intellectual property (IP) are subject to the valuation anomalies commonly referred to as “endowment effects”. Traditional conceptions of the value of IP rely on assumptions about human rationality derived from classical economics. The law assumes that when people make decisions about buying, selling, and licensing IP they do so with fixed, context-independent preferences. Over the past several decades, this rational actor model of classical economics has come under attack by behavioral data showing that people do not always make strictly rational decisions. Perhaps the most important research in this field is that related to the “endowment effect” – the discovery that, contrary to economic predictions, people value the same object more when they own it than when they do not.

To date, the endowment effect has been observed for a variety of goods including mugs, lottery tickets, and hunting permits. Our experiment establishes a substantial valuation asymmetry between authors of poems and potential purchasers of them. As we explain in detail in the article, we constructed a market for the poems that was modeled on a market for licensing IP. The observed differences in valuation indicate that IP licensing markets may be substantially less efficient that previously believed. Our results suggest that (1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and (2) large gaps arise between purchasers’ willingness to pay and sellers’ willingness to accept even though the poems are non-rival property and the contemplated alienation of the property is therefore only partial.

Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place – we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal, and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well-established custom or pattern helps to inform valuation. These results have considerable implications for the structuring of IP rights, IP formalities, IP licensing, and fair use.

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