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Mental accounting in the housing market

  • Johan Almenberg
  • Artashes Karapetyan

We 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 suboptimal 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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 453.

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Date of creation: Nov 2009
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Handle: RePEc:zur:iewwpx:453
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