Working Paper: CEPR ID: DP14147
Authors: Steffen Andersen; Cristian Badarinza; Lu Liu; Julie Marx; Tarun Ramadorai
Abstract: We quantify reference dependence and loss aversion in the housing market, using a structural model of the house selling decision estimated on rich Danish administrative data. Households derive substantial utility from gains and losses over the original house purchase price, with losses affecting households 2 to 2.5 times more than gains. The model shows that reference dependence and loss aversion, in combination with household responses to mortgage down-payment constraints can help to explain the positive correlation between aggregate house prices and turnover. The model cannot fully explain the new empirical observation that reference-dependence appears attenuated when households are more financially constrained.
Keywords: housing; mortgages; loss aversion; reference dependence; downpayment constraints
JEL Codes: D03; D12; D14; G02; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reference dependence (D81) | household utility (D11) |
| loss aversion (G41) | household utility (D11) |
| household utility (D11) | house selling decisions (R21) |
| anticipated gains (D84) | listing prices (D49) |
| anticipated losses (G33) | listing prices (D49) |
| mortgage downpayment constraints (G51) | seller behavior (D21) |
| reference dependence + financial constraints (D10) | market outcomes (P42) |
| reference dependence (D81) | attenuation under financial constraints (G32) |