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

Cristian Badarinza, Tarun Ramadorai, Juhana Siljander and Jagdish Tripathy

No 19123, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: House prices; Property taxation; Loss aversion; Reference dependence; Search and matching; Equilibrium; Lock-in; Housing transaction volumes (search for similar items in EconPapers)
JEL-codes: D12 D3 E03 G02 R21 R30 (search for similar items in EconPapers)
Date: 2024-06
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Working Paper: Behavioral lock-in: aggregate implications of reference dependence in the housing market (2024)
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