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Self-Estimation Bias, Wealth Illusion, and Consumption——Empirical Evidence from Chinese Urban Households
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TitleSelf-Estimation Bias, Wealth Illusion, and Consumption——Empirical Evidence from Chinese Urban Households  
AuthorGao Nan and Liang Pinghan  
OrganizationWenlan School of Business, Zhongnan University of Economics and Law;School of Government, Sun Yat-sen University; 
Key WordsSelf-Estimation Bias; Endowment Effect; Wealth Illusion; Household Consumption 
AbstractHousing assets take a large share in Chinese urban household wealth, and the change of real estate values has important impacts on household consumption. Based on the theory of endowment effects from Behavioral Economics, by using two waves of the CHFS 2011 and 2013 data, this paper finds out that Chinese urban residents will systemically mis-estimate the value of their own real estate. On average, residents overestimate the value of real estate by 12%. This leads to wealth illusion among households, consequently increases the household consumption: 10% increase in the extent of mis-estimation is associated with 1% increase in household consumption. This paper also takes a variety of robust checks, e.g., employing a fixed effect model, including the lagged terms in the regression, applying 2SLS method, and constructing the real value of real estate by various methods. It turns out that the basic findings maintain. Furthermore, it is shown that the release of household liquidity constraint is a key reason underlying the function of wealth illusion, self-estimation bias lowers saving rate, and increases the conspicuous consumption. This paper concludes that increasing marketization level, raising information transmission efficiency, and lowering information cost can contribute to reducing the self-estimation bias, hence correct the impact of irrational behavior and improve the welfare. 
Serial NumberWP1410 
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