Does the exemption of the owner-occupied home from the pensions means test affect trade-downs? Evidence from Australia. * Renuka Sane University of New South Wales r.sane@unsw.edu.au John Piggott University of New South Wales j.piggott@unsw.edu.au July 2009 Abstract Many developed economies offer the elderly a means tested pension; in most cases the owner- occupied home receives preferential treatment. Such policies create price distortions which may adversely affect household choice in an important market, and which have the potential to gen- erate a serious economy-wide misallocation of resources. We study the impact of the exemption of the owner-occupied home from the age pension means-test on residential choice among Aus- tralia’s elderly. We estimate a model of trade-down behavior conditional on mobility by using the Household, Income and Labor Dynamics (HILDA) data set. Results suggest that the exemp- tion of the owner-occupied home from the age pension means-test generates sticky trade-down behavior, consistent with resource misallocation.. Keywords: means-testing; owner-occupier exemption; home-equity drawdown; elderly JEL Classification: I38; H5; J14; R2 * We would like to thank Garry Barrett, Denzil Fiebig, Lorraine Ivancic, Olivia Mitchell and Rik Sen for useful comments. We are grateful to the Australian Research Council for financial support. All remaining errors are our own. Views and opinions are the authors’ own and not necessarily of the institutions with which they are affiliated. c Sane and Piggott 2009. All rights reserved.