Working Paper: NBER ID: w25650
Authors: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
Abstract: Simonsohn and Loewenstein (SL 2006) present evidence that a household moving from one US city to another tends to pay a rent level that is closer to the city of origin, relative to comparable locals. Building on “Memory, Attention, and Choice” (BGS 2019), we show that these effects emerge from the interaction between memory and attention. In our model, memory is a database of experiences such as rents. The current rent cues recall of past rents, giving rise to a rental norm. A large discrepancy between the current rent and the memory-based norm surprises and attracts the mover’s attention, distorting choice. Thus, when rents in Pittsburgh cue recall of rent experiences in San Francisco, they look surprisingly cheap by comparison, leading the household to spend more. We revisit the SL evidence in light of the model. Besides generating the basic SL findings, our model yields two new predictions, which we test and confirm using 20 additional years of data.
Keywords: memory; reference prices; rental choice
JEL Codes: D03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past rental experiences (R21) | rental norm (R21) |
| rental norm (R21) | higher willingness to pay (D11) |
| high-rent city (R31) | expensive apartments in lower-rent city (R31) |
| time in new city (R23) | adaptation to local rents (R21) |
| origin city's rent (R21) | influence on renters (R21) |
| origin city's rent (cheaper cities) (R31) | stronger effect on renters (R21) |
| origin city's rent (expensive cities) (R31) | weaker effect on renters (R21) |
| experience in new city (R23) | decay in reliance on past reference points (C41) |