A problem with observational equivalence: Disentangling the renter illusion hypothesis

Abstract

The renter illusion hypothesis argues that renters are more likely to support local public expenditures than homeowners because of a misperception about the actual costs and benefits they face. Numerous empirical studies have produced mixed results which are difficult to interpret because of the lack of micro foundations for the renter illusion hypothesis. This paper helps fill that gap by introducing in a theoretical model the concept of renter illusion behaviour, which can be seen as a rational behaviour in the presence of cognitive anomalies (i.e. behavioural or bounded rationality) and asymmetric information. The resulting theoretical framework can be used to interpret and support a large share of micro- and macro-econometric findings in the previous empirical literature on renter illusion.