Reference Dependence in the Housing Market
Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx, Tarun Ramadorai
American Economic Review · 2022 · Volume 112 · Issue 10
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.
Keywords
Consumer Economics: Empirical Analysis, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Household Finance: Household Saving, Borrowing, Debt, and Wealth, Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand, Housing Supply and Markets
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