Reference Dependence in the Housing Market

Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx, Tarun Ramadorai

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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.
Original languageEnglish
JournalAmerican Economic Review
Issue number10
Pages (from-to)3398-3440
Number of pages43
Publication statusPublished - Oct 2022

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