Reference Dependence in the Housing Market
American Economic Review
vol. 112,
no. 10, October 2022
(pp. 3398-3440)
Abstract
We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a "hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.Citation
Andersen, Steffen, Cristian Badarinza, Lu Liu, Julie Marx, and Tarun Ramadorai. 2022. "Reference Dependence in the Housing Market." American Economic Review, 112 (10): 3398-3440. DOI: 10.1257/aer.20191766Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
- R31 Housing Supply and Markets