Anchoring Under Currency Substitution: A Ratchet Price Mechanism in the Housing Market

37 Pages Posted: 27 Nov 2017

See all articles by Danny Ben-Shahar

Danny Ben-Shahar

Tel Aviv University

Roni Golan

Technion-Israel Institute of Technology; Tel Aviv University - Coller School of Management

Date Written: Winter 2017

Abstract

The currency substitution experienced by the Israeli real estate market in the past decades serves as a unique case for studying the effect of the anchoring heuristic on prices. We hypothesize that players utilize current and past exchange rates between the old and new currency to affect the closing price in their favor. Results of micro‐ and macro‐level estimations indicate that exchange rate fluctuations associate with an upward ratchet price effect. Furthermore, we find that the ratchet price mechanism disappears once the currency substitution is completed. These findings provide new evidence of the effect of anchoring on a market whose transactions involve substantial, long‐term economic consequences.

Suggested Citation

Ben-Shahar, Danny and Golan, Roni, Anchoring Under Currency Substitution: A Ratchet Price Mechanism in the Housing Market (Winter 2017). Real Estate Economics, Vol. 45, Issue 4, pp. 861-897, 2017. Available at SSRN: https://ssrn.com/abstract=3076666 or http://dx.doi.org/10.1111/1540-6229.12161

Danny Ben-Shahar (Contact Author)

Tel Aviv University ( email )

Tel Aviv
Israel

Roni Golan

Technion-Israel Institute of Technology ( email )

Technion City
Haifa 32000, Haifa 32000
Israel

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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