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Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market

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  • Badarinza, Cristian
  • Ramadorai, Tarun
  • Siljander, Juhana
  • Tripathy, Jagdish

Abstract

We show both empirically and theoretically that households' attachment to nominal anchors in the housing market creates aggregate nominal rigidities, with material economic consequences. A new statistic, the prevalence of “paper losses†in the stock of residential properties, is remarkably effective at explaining cross-regional variation in a range of important market outcomes. We setup and structurally estimate a dynamic search and matching model with reference-dependent agents, rich heterogeneity, and realistic financial constraints to rationalize the data and study housing-market fiscal policy. Behavioral frictions dampen the effects of transactions taxes, and increase the revenue-maximizing level of the ongoing property tax rate.

Suggested Citation

  • Badarinza, Cristian & Ramadorai, Tarun & Siljander, Juhana & Tripathy, Jagdish, 2024. "Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market," CEPR Discussion Papers 19123, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19123
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    More about this item

    Keywords

    House prices; Property taxation; Loss aversion; Reference dependence; Search and matching; Equilibrium; Lock-in; Housing transaction volumes;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D3 - Microeconomics - - Distribution
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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