Discussion paper
DP19123 Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market
We show both empirically and theoretically that households' attachment to nominal anchors in the housing market creates aggregate nominal rigidities, with material economic consequences. A new statistic, the prevalence of “paper losses” in the stock of residential properties, is remarkably effective at explaining cross-regional variation in a range of important market outcomes. We setup and structurally estimate a dynamic search and matching model with reference-dependent agents, rich heterogeneity, and realistic financial constraints to rationalize the data and study housing-market fiscal policy. Behavioral frictions dampen the effects of transactions taxes, and increase the revenue-maximizing level of the ongoing property tax rate.
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