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Mental Accounting in the Housing Market

  • Almenberg, Johan

    ()

    (Research Institute of Industrial Economics (IFN))

  • Karapetyan, Artashes

    (Empirical Institute of Economics and SFI)

We use a survey to identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a sub-optimal capital structure; but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 798.

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Length: 44 pages
Date of creation: 04 Jun 2009
Date of revision:
Handle: RePEc:hhs:iuiwop:0798
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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