A problem with observational equivalence: Disentangling the Renter Illusion hypothesis

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 due to 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 behavior, which can be seen as a rational behavior in the presence of cognitive anomalies (i.e. behavioral 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.