American Economic Review Vol. 112 No. 10 2022

Reference Dependence in the Housing Market

Steffen Andersen¹; Cristian Badarinza²; Lu Liu³; Julie Marx¹; Tarun Ramadorai⁴

¹ Copenhagen Business School (email: ) · ² National University of Singapore (email: ) · ³ The Wharton School, University of Pennsylvania (email: ) · ⁴ Imperial College, London, and CEPR (email: )

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.

DOI

10.1257/aer.20191766

Volume

112

Issue

10

Pages

3398-3440

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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