Abstract
This paper proposes a theoretical framework based on prospect theory to explain the determinants of housing satisfaction among relocated residents. We test the two most important elements of prospect theory, namely, reference point dependence and loss aversion. For reference point dependence, we investigate the presence of both internal and external reference points; for loss aversion, we test its effect directly by comparing coefficients in loss and gain domains and indirectly by verifying the presence of the endowment effect. Our study area is Xiamen, China, where the recent urbanization development provides a natural experiment setting to reliably test our hypotheses. Our empirical findings provide convincing evidence to support the four hypotheses developed from prospect theory, indicating that prospect theory is a working theory to better understand the motivations and concerns of relocated residents. Policy recommendations are subsequently derived to reduce social conflicts and disharmony caused by urban redevelopment and relocations.
Highlights
Development-induced displacements are a growing global phenomenon that may lead to violations of the right to adequate housing as defined in the Habitat Agenda (UN-Habitat, 2011)
We investigate the presence of both internal and external reference points; for loss aversion, we test its effect directly by comparing coefficients in loss and gain domains and indirectly by verifying the presence of the endowment effect
prospect theory (PT) is an improvement over standard economic theory because it considers both the consumption utility derived from the outcome itself (i.e., X) and the gain/loss utility defined by comparisons with a reference point (i.e., r)
Summary
Development-induced displacements are a growing global phenomenon that may lead to violations of the right to adequate housing as defined in the Habitat Agenda (UN-Habitat, 2011). Reference dependence helps explain why farmers experienced welfare loss after land requisition (Li, Huang, Kwan, Bao, & Jefferson, 2015) and why the Beijing Olympic regeneration caused disadvantaged residents to anticipate relocation to undesirable areas (Wang, Bao, & Lin, 2015) In both studies, all respondents were better off in absolute terms as they were given compensation for their lost land or have benefited from amenity improvement from the regeneration projects. The same outcome could lead to divided responses given very different expectations These studies are not directly related to our research topic, they do highlight the importance and benefits of considering psychological factors in the public policy domain.
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