In the Long Run We All Trade: Reference Dependence in Dynamic Economies

We explore the impact of reference dependence on trade in dynamic economies, both theoretically and experimentally. We first show that under plausible axioms, dynamic economies generate a momentum effect capable of reducing or eliminating the initial trade-dampening impact of the endowment effect over time. We then introduce a novel experiment designed to test this prediction. Our results confirm that subjects’ willingness to trade dramatically increases between the first and second period of our experiment as predicted by the theory. The data also suggest that subjects become increasingly sophisticated over the course of the experiment leading to stronger erosion of the endowment effect than our theory predicts.