Behavioral lock-in: aggregate implications of reference dependence in the housing market

68 Pages Posted: 22 Jan 2024

See all articles by C. Badarinza

C. Badarinza

National University of Singapore (NUS) - Department of Real Estate

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Juhana Siljander

Imperial College London

Jagdish Tripathy

Bank of England

Date Written: January 12, 2024

Abstract

We study the aggregate implications of reference dependent and loss averse preferences in the housing market. Motivated by micro evidence, we embed optimizing homeowners with these preferences into a dynamic search and matching equilibrium model with rich heterogeneity and realistic constraints. We assess the model using large and granular administrative data tracking buyers and sellers in the UK housing market; the predictions match regional and time variation in price growth and transaction volumes. The model shows that behavioral frictions in a decentralized market can link nominal quantities with real outcomes; and reveals that the distribution of potential nominal gains in the housing market is a key policy-relevant statistic.

Keywords: Reference dependence, behavioral frictions, housing

JEL Classification: D12, D91, G51, R21, R31

Suggested Citation

Badarinza, Cristian and Ramadorai, Tarun and Siljander, Juhana and Tripathy, Jagdish, Behavioral lock-in: aggregate implications of reference dependence in the housing market (January 12, 2024). Bank of England Working Paper No. 1054, Available at SSRN: https://ssrn.com/abstract=4702481 or http://dx.doi.org/10.2139/ssrn.4702481

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Juhana Siljander

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Jagdish Tripathy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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