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Department of Economics, Uppsala University Working Paper Series, Department of Economics, Uppsala University

No 2017:10:
The Price of Inattention: Evidence from the Swedish Housing Market

Luca Repetto () and Alex Solis ()

Abstract: Do behavioral biases affect prices in a high-stake market? We study the role of left-digit bias in the purchase of an apartment, one of the most important assets in a household’s portfolio. Left-digit bias is the inability to fully process digits after the first, perceiving prices just below a round number (such as $3.99) as cheaper than their round counterpart ($4). We start by documenting that apartments listed at just-below asking prices are sold at a 3-5% higher final price after an auction. This effect appears not to be driven by i) differences in observable characteristics; ii) differences in real estate agents’behavior; or iii) institutional characteristics of the market. We show that apartments using just-below prices attract more bidders and bids, leading to higher competition and to a higher final price. Our results suggest that inattentive buyers might be losing roughly half a year of disposable income.

Keywords: Housing market; auctions; inattention; first-digit bias; (follow links to similar papers)

JEL-Codes: C78; D44; D83; R31; (follow links to similar papers)

48 pages, September 27, 2017

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