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Do Sunk Costs Affect Prices in the Housing Market?

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  • 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)

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.

Suggested Citation

  • Dimuthu Ratnadiwakara & Vijay Yerramilli, 2022. "Do Sunk Costs Affect Prices in the Housing Market?," Management Science, INFORMS, vol. 68(12), pages 9061-9081, December.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9061-9081
    DOI: 10.1287/mnsc.2021.4285
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    References listed on IDEAS

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