Do Sunk Costs Affect Prices in the Housing Market?

We use a unique feature of California’s property tax system to empirically identify the causal 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 and for properties whose value is harder to assess. The effect of property taxes on listing price is mostly transmitted to the selling price, which is consistent with the idea that buyers use listing prices as anchors to assess property values. Overall, our results suggest that sunk costs affect prices in the housing market. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: Data files are available at https://doi.org/10.1287/mnsc.2021.4285 .