A prospect theory-based analysis of housing satisfaction with relocations: Field evidence from China

Abstract

This paper proposes a theoretical framework based on prospect theory to explain the determinants of housing satisfaction among relocated residents. We test the two most important elements of prospect theory, namely, reference point dependence and loss aversion. For reference point dependence, we investigate the presence of both internal and external reference points; for loss aversion, we test its effect directly by comparing coefficients in loss and gain domains and indirectly by verifying the presence of the endowment effect. Our study area is Xiamen, China, where the recent urbanization development provides a natural experiment setting to reliably test our hypotheses. Our empirical findings provide convincing evidence to support the four hypotheses developed from prospect theory, indicating that prospect theory is a working theory to better understand the motivations and concerns of relocated residents. Policy recommendations are subsequently derived to reduce social conflicts and disharmony caused by urban redevelopment and relocations.