| Summary: | We show that the Hicksian welfare measures of compensating variation and equivalent variation are equivalent if one is evaluated at a compensated income. Based on this we demonstrate that the normative endowment effect, when a consumer,s willingness to accept exceeds her willingness to pay at a given income level, occurs if and only if the consumer,s compensated-income function is submodular in the attributes describing the underlying welfare change. Lastly, we provide various necessary and sufficient conditions for the normative endowment effect, including monotonicity, complementarity of the welfare-change attribute and income, and proximity to indifference points, and discuss empirical implications. |
