Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 798: Mental Accounting in the Housing Market

Johan Almenberg () and Artashes Karapetyan
Additional contact information
Johan Almenberg: Research Institute of Industrial Economics (IFN), Postal: and Stockholm School of Economics
Artashes Karapetyan: Empirical Institute of Economics and SFI, Postal: University of Zürich, Switzerland

Abstract: We use a survey to identify a consumer bias with regard to different sources of debt-financing. Less salient debt may generate psychological benefits. This should be weighed against the possible economic costs of a sub-optimal capital structure; but low levels of financial literacy make it unlikely that all households perceive the full economic costs. As a result there is a bias in favour of less salient debt. In a market with limited scope for arbitrage this consumer bias is likely to generate inefficiencies. We examine such a market in both theory and practice. The predictions of our model are given strong support by market data.

Keywords: Household Finance; Mental Accounting; Co-op; Capital Structure

JEL-codes: D12; G14; G21; G32

44 pages, June 4, 2009

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