Paper

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 financial constraints. We calibrate and evaluate the model
using granular administrative data from the U.K. housing market. Behavioral frictions
act as a nominal rigidity, a cause of hysteresis in response to shocks, and a source of
distortion 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 predicts local responses to policy interventions.