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Estimating the weight of opportunity costs in housing consumption

CPB Discussion Paper 314, 16 November 2015

People tend to neglect or underweight opportunity costs. Strong empirical evidence for the size of the underweighting appears to be absent. What are the weights people attach to opportunity costs relative to out-of-pocket costs?

In this paper I estimate the weight of opportunity costs in probably the largest economic decision that households make: buying a house. I show that homeowners attach approximately twice as much weight to out-of-pocket costs of their housing consumption than to the opportunity costs associated with this.

Highlights

  • Housing consumption lends itself well for empirically analyzing opportunity costs.
  • I split up the user costs of housing in out-of-pocket and opportunity costs.
  • Homeowners weigh in their opportunity costs at only 50 to 65 percent.
  • It is unclear whether homeowners underestimate these costs or simply care less about them.

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