Loss Aversion and Seller’s Reservation Value in the Housing Market

This study examines the effect of loss aversion on the reservation value of a house seller. Contrary to the finding of a prior theoretical study by Buisson (2016), we show that loss aversion can increase the reservation value as hypothesized in many empirical literatures. Loss aversion makes the seller prefer postponing realization of loss, resulting in an increased reservation value when the selling price is below the reference price. This effect only works in an infinite-time model in which the seller can indefinitely avoid selling. However, in a two-period model in which the seller must sell the house in the first or second period, the possibility of a forced sale at a loss in the second period prompts the seller to prefer selling the house sooner. Thus, loss aversion may either increase or decrease the reservation value in a two-period model