Behavioral Lock-In: Housing Markets with Reference Dependent Agents

Title: Behavioral Lock-In: Housing Markets with Reference Dependent Agents

Abstract: We embed optimizing agents with reference-dependent and loss-averse preferences into a dynamic equilibrium search and matching model of the housing market with rich heterogeneity and realistic constraints. We estimate and evaluate the model using granular administrative data from the U.K. housing market. Behavioral frictions act as a nominal rigidity, increasing the distortions associated with transaction taxes, and generating a novel source of inefficiency for ongoing property taxes. At the aggregate level, a simple statistic, the prevalence of “paper losses” in the stock of properties, captures variation in prices and volumes across regions, and determines variation of policy impact across locations.