Anchoring and Housing Choice: Results of a Natural Policy Experiment

Abstract

This research employs data from a natural experiment to assess the effects of behavioral heuristics on housing choice and public program management. The analysis focuses on programs designed to privatize public housing in Israel. The government programs provided tenants with a call (real) option to purchase their rental unit at a discounted exercise price. We employ a large panel of transactions over the 1999-2008 period to evaluate whether tenants used prior program price reductions as anchors in their purchase decisions. Results of hazard model estimation provide strong evidence of anchoring in the timing of home purchase. Further, model simulation suggests that by accounting for the anchoring heuristic, program managers could have both accelerated purchases and significantly increased government revenues associated with privatization. We also find evidence that anchoring varies with individual and market characteristics.

Keywords: behavioral economics, anchoring, housing choice, public policy

JEL Classification: D03, C9, R38