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Behavioral lock-in: aggregate implications of reference dependence in the housing market

Author

Listed:
  • Badarinza, Cristian

    (National University of Singapore)

  • Ramadorai, Tarun

    (Imperial College Business School and CEPR)

  • Siljander, Juhana

    (Imperial College Business School)

  • Tripathy, Jagdish

    (Bank of England)

Abstract

We study the aggregate implications of reference dependent and loss averse preferences in the housing market. Motivated by micro evidence, we embed optimizing homeowners with these preferences into a dynamic search and matching equilibrium model with rich heterogeneity and realistic constraints. We assess the model using large and granular administrative data tracking buyers and sellers in the UK housing market; the predictions match regional and time variation in price growth and transaction volumes. The model shows that behavioral frictions in a decentralized market can link nominal quantities with real outcomes; and reveals that the distribution of potential nominal gains in the housing market is a key policy-relevant statistic.

Suggested Citation

  • Badarinza, Cristian & Ramadorai, Tarun & Siljander, Juhana & Tripathy, Jagdish, 2024. "Behavioral lock-in: aggregate implications of reference dependence in the housing market," Bank of England working papers 1054, Bank of England.
    • Handle: RePEc:boe:boeewp:1054
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    References listed on IDEAS

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    More about this item

    Keywords

    Reference dependence; behavioral frictions; housing;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • 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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