Anchoring under Currency Substitution: A Ratchet Price Mechanism in the Housing Market

Danny Ben-Shahar, Roni Golan

Research output: Contribution to journalArticlepeer-review

Abstract

The currency substitution experienced by the Israeli real estate market in the past decades serves as a unique case for studying the effect of the anchoring heuristic on prices. We hypothesize that players utilize current and past exchange rates between the old and new currency to affect the closing price in their favor. Results of micro- and macro-level estimations indicate that exchange rate fluctuations associate with an upward ratchet price effect. Furthermore, we find that the ratchet price mechanism disappears once the currency substitution is completed. These findings provide new evidence of the effect of anchoring on a market whose transactions involve substantial, long-term economic consequences.

Original languageEnglish
Pages (from-to)861-897
Number of pages37
JournalReal Estate Economics
Volume45
Issue number4
DOIs
StatePublished - 1 Dec 2017

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