Anchoring and Housing Choice: Results of a Natural Policy Experiment
39 Pages Posted: 17 Dec 2011
Date Written: December 15, 2011
This research applies data from a unique natural policy experiment to assess the effects of heuristics on housing decisions and public policy outcomes. The data derive from programs designed to privatize public housing in Israel. The programs provided tenants with a call (real) option to purchase their rental unit at a discounted exercise price. We employ a panel of 9,547 transactions over the 1999-2008 period to assess the role of heuristics in determination of privatization outcomes. Specifically, we evaluate whether tenants used prior program price discounts as anchors in their purchase decisions. Results of hazard model estimation provide strong evidence of anchoring effects in the timing of home purchase. Further, model simulation suggests that by accounting for the anchoring heuristic, the government could have both accelerated the purchase decision by an average of 38 months and increased revenues associated with the privatization programs by 27 percent. We also find evidence that anchoring varies with individual and housing market characteristics.
Keywords: anchoring, public housing, behavioral economics
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