Sunk-Cost Fallacy and Seller Behavior in the Housing Market

Abstract

We use a unique feature of California's property tax system to empirically identify the effect of selling homeowners' past property tax payments on their choice of listing price. Although past property taxes are sunk costs, we find that they have a significant positive effect on the sellers' choice of listing price, which is inconsistent with rational models of decision making. This effect is stronger when sellers expect to sell at a loss relative to their purchase price, for high-valued properties, and in zip codes with lower housing transaction volumes. Interestingly, the sunk-cost effect is also stronger for sellers with higher mortgage debt, especially when they expect to incur a loss on the sale. Overall, our results suggest that the sunk-cost fallacy affects seller behavior in the housing market.