Do Sunk Costs Affect Prices in the Housing Market?

Dimuthu Ratnadiwakara () and Vijay Yerramilli ()
Additional contact information
Dimuthu Ratnadiwakara: E. J. Ourso College of Business, Louisiana State University, Baton Rouge, Louisiana 70808
Vijay Yerramilli: C. T. Bauer College of Business, University of Houston, Houston, Texas 77204

Management Science, 2022, vol. 68, issue 12, 9061-9081

Abstract: We use a unique feature of California’s property tax system to empirically identify the causal effect of selling homeowners’ past property tax payments on their choice of listing price. Although past property taxes are sunk costs, we find that they have a significant positive effect on the sellers’ choice of listing price, which is inconsistent with rational models of decision making. This effect is stronger when sellers expect to sell at a loss relative to their purchase price and for properties whose value is harder to assess. The effect of property taxes on listing price is mostly transmitted to the selling price, which is consistent with the idea that buyers use listing prices as anchors to assess property values. Overall, our results suggest that sunk costs affect prices in the housing market.

Keywords: sunk-cost fallacy; housing market; listing price; property tax (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2021.4285 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9061-9081

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().