Examining Omitted Variable Bias in Anchoring Premium Estimates: Evidence Based on Assessed Value

Abstract

We propose a new assessed value approach to control for the amount of persistent unobserved quality. We apply our approach to a well-established two-stage framework developed by Genesove and Mayer (GM, 2001), who test the effect of an expected loss on final transaction prices in the housing market. We show that our assessed value model effectively mitigates the omitted variable bias and produces similar results as GM when the first-stage residual is included. Importantly, our model does not rely on repeat sales and therefore provides a powerful new tool for estimating market value. Results are robust to alternative specifications, to controlling for loan-to-value ratios, to replacing final sale price with listing price, to alternative fixed effects, to subperiods, to different holding periods, to simulated quality, to excluding flippers, and to controlling improvements between sales.

Keywords: Anchoring, Loss Aversion, Repeat Sales, Omitted Variable Bias, Unobserved Heterogeneity

JEL Classification: C1, E00, R3