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Does owners’ purchase price affect rent offered? Experimental evidence

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  • Hirota, Shinichi
  • Suzuki-Löffelholz, Kumi
  • Udagawa, Daisuke

Abstract

In standard economic theory, rent determines real estate price; however, we hypothesize that in behavioral economics, real estate price affects the rent offered. We conduct laboratory experiments where a real estate market opens before a rental market and examine whether owners’ purchase price influences their rent-offering behavior. We find that the higher the purchase price, the higher the rent offered. We also confirm that higher contracted rents lead to higher prices in subsequent real estate markets. This suggests a positive interaction between real estate prices and rents in the real economy, which can explain the acceleration of price increases often observed in real estate markets.

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  • Hirota, Shinichi & Suzuki-Löffelholz, Kumi & Udagawa, Daisuke, 2020. "Does owners’ purchase price affect rent offered? Experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 25(C).
    • Handle: RePEc:eee:beexfi:v:25:y:2020:i:c:s221463501830282x
    DOI: 10.1016/j.jbef.2019.100260
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    More about this item

    Keywords

    Real estate prices; Rents; Laboratory experiment; Behavioral economics; Sunk cost;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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