Are Home Buyers Inattentive? Evidence from Capitalization of Energy Costs

Abstract

In what follows, I develop a discrete choice framework where home buyer (i) chooses house (j) in geographic area (a) in year (t) from a choice set with budget constraint w i . The consumer has an outside option of not buying a house with a utility level normalized to zero. Consumer i's indirect utility from the purchase of a home is a function of the cost, which has two components: 1) the transaction price, H jat , and 2) the net present value (NPV) of the expected stream of future fuel payments, F jat . Utility is also a function of observable home attributes, X jat , unobservable home attributes,ξ jat , neighborhood-year specific amenities, λ at , and individual taste ε ijat as follows.The marginal utility of money is represented by η. The implied discount rate is the discount rate that consumers would have to be using for γ = 1. If the implied discount rate is higher than the borrowing rate for the marginal dollar, then consumers are inattentive energy costs. 1 In other words, demand for homes with high fuel costs is too high relative to what would be optimal.The choice to sell or buy a home in any given year is driven by exogenous events such as changes in employment or changes in family composition. All potential home buyers in geographic area a in year t have the same income and face the same choice set of homes, 1 The word "inattentive" means that consumers are undervaluing a dollar spent on future energy costs relative to a dollar spent in upfront price. This "mistake" might arise through several potential mechanisms such as imperfect information, biased beliefs, present bias, or bias toward concentration. 0

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“…4 The price-sensitivity results are in line with recent research on cars, which finds no significant undervaluation of future energy costs at the moment of investment (Allcott and Wozny 2014, Busse, Knittel and Zettelmeyer, 2013, Sallee, West and Fan, 2015). For the housing market, Myers (2017) and Liski and Harjunen (2014) have shown that the energy costs capitalise into house prices, implying reasonable discounting of future costs at 8-10 percent discount rates. Also Rapson (2014) finds evidence of forward-looking consumers, using a dynamic model of air conditioner purchase.…”

Behavioral Inattention and Human Capital Accumulation

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