Distortions in Real Estate Transactions with Out-of-State Participants

Using the MLS and the land registration data from Indiana, this paper identifies and explains price distortions associated with out-of-state sellers and buyers in the housing market. We find that out-of-state buyers pay 20.4% higher prices than local buyers, and the premium is fully explained by the former purchasing larger homes than the latter. On the other hand, out-of-state sellers receive a 21.2% price discount, among which 9.3% is attributable to differences in transactional characteristics, 3.2% is explained by increased motivation and weak bargaining power of out-of-state sellers, and 1.5% is due to differences in agent characteristics and behaviours. The remaining 7.2% discount varies systematically with the informational disadvantage of out-of-state sellers, and with the market condition. Our results are robust to model misspecification.     

Information, Search, and House Prices: Revisited

Buyers pay different prices for nearly identical homes. One explanation for this is that housing markets are thin, resulting in price bargaining between sellers and buyers. If the relative bargaining power of buyers varies, so will sales prices. One hypothesis is that the relative bargaining strength of buyers coming from outside the local market relative to that of local residents is weak, because distant buyers have high search costs and may know less about the nuances of the local market. Our results, based upon a large number of single-family home transactions from the state of Florida, lend support to this hypothesis. Another related hypothesis is that buyers?? price expectations are anchored to prices they were accustomed to at their previous residence. Hence, if they come from high price markets they will tend to pay more for their new home. This hypothesis is also supported by our results.     

Pricing real assets with costly search

Markets for many real assets are characterized by sequentialsearch followed by bilateral bargaining between matched buyersand sellers. For a category of real assets, the joint, intertemporalvaluation problems of buyers, owners, and sellers and the associatedNash pricing function are solved explicity. In equilibrium,the average transaction price is a noisy, proportional randomwalk, and the liquidity premium is positive for matched owners.Depending on the values of the parameters, the liquidity ofoptimal development with costly search, the optimal exercisepoint, cost of development, and value of the undeveloped assetare calculated analytically. With search, development can occursooner and undeveloped assets have lower market values thanthe standard solution without search.     

Bargaining Strength and Property Class in Office Markets

This paper examines the influence of bargaining power and property class on the prices of heterogeneous goods. Specifically, it explores the impact of buyer and seller characteristics on the transaction prices of office properties. The empirical model is based on the work of Harding, Rosenthal, and Sirmans (2003), which developed a method to distinguish between the impact of buyer and seller attributes on bargaining power and the choice of otherwise unidentified price effects (i.e., property class) in the context of hedonic price models. The data set contains information on transaction prices of office properties in Cook, DuPage, and Lake Counties, Illinois from 1995 to 1997. The results reveal systematic differences in bargaining power and property class for certain groups of buyers and sellers contained within the sample.     

Valuation in Over-the-Counter Markets

We provide the impact on asset prices of search-and-bargainingfrictions in over-the-counter markets. Under certain conditions,illiquidity discounts are higher when counterparties are harderto find, when sellers have less bargaining power, when the fractionof qualified owners is smaller, or when risk aversion, volatility,or hedging demand is larger. Supply shocks cause prices to jump,and then "recover" over time, with a time signature that isexaggerated by search frictions: The price jump is larger andthe recovery is slower in less liquid markets. We discuss avariety of empirical implications.     

Agent Change and Seller Bargaining Power: A Case of Principal Agent Problem in the Housing Market

When a seller hires an agent to sell his/her property, a successful outcome depends on the list price, marketing time, unobserved relative bargaining power of the buyers and sellers, and the effort levels of the seller and the seller’s agent. A divergence with respect to the list/transaction prices and the expected effort levels between seller and agent will create a principal-agent interest conflict. This conflict in some cases results in an agent change before the house is sold. The change will reduce the relative bargaining power of the seller, affecting the observed marketing time and transaction price. This study estimates the effects of an agent change on marketing time and transaction price after controlling for degree of overpricing, list-price revisions, marketing time, and endogenous selection bias. Our results show that: (1) on average, an agent change increases the marketing time by about 3 months and adversely affects the transaction price by about 2.7 %. Furthermore, we found that an agent change before the expiration of the listing contract, compared to that of after the expiration, has a smaller effect on the marketing time (2.3 vs. 3.8 months) and has a smaller transaction price discount (2.1 % vs. 4.2 %).     

Auctions versus negotiations: the effects of inefficient renegotiation

For the procurement of complex goods, the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, scoring auctions implement the efficient allocation. If this is not feasible, the buyer must choose between a price‐only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is very costly, and if the buyer's bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.     

Payoff uncertainty,bargaining power,and the strategic sequencing of bilateral negotiations

This article investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. The possibility of inefficient trade may generate strict sequencing preference. The buyer begins with the weaker seller if the sellers have diverse bargaining powers and with the stronger one if both sellers are strong bargainers. This sequencing is likely to increase the social surplus. Moreover, the buyer may find it optimal to raise her own acquisition cost by committing to a minimum purchase price or outsourcing. The first‐ and second‐mover advantages for the sellers are also identified.     

Sales Concessions in the US Housing Market

This article examines the use of concessions in the US housing market, specifically payments for closing costs, home warranties, and structural repairs. This is the first study to examine the motivations and characteristics of homeowners that utilize concessions. It also examines the impact concessions have on transaction prices and marketing durations. While the literature has attempted to determine if concessions can reduce marketing durations or increase transaction prices, the evidence is tainted by endogeneity and sample issues. Additionally, we find that relative bargaining power between buyers and sellers has a fundamental effect on how concessions alter prices and marketing durations. This aspect has been considered only narrowly in the extant literature. Our results demonstrate that when sellers have bargaining power, transactions including concessions exhibit higher prices and shorter marketing durations. Conversely, when buyers have greater negotiation leverage, transactions including concessions experience lower prices and longer marketing periods.     

Discussion of “Information and Liquidity”

I discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2011, this issue, Forthcoming) . I consider a model with bilateral matching and bargaining in which a perfectly divisible asset serves as means of payment. A recognizability problem is introduced by assuming that the asset can be counterfeited at a positive cost. In contrast to Lester, Postlewaite, and Wright , in equilibrium sellers always accept objects that they do not recognize. The private information problem manifests itself by smaller quantities traded in uninformed matches.     

The welfare effects of third‐degree price discrimination in intermediate good markets: the case of bargaining

This article examines the welfare effects of third‐degree price discrimination by a monopolist selling to downstream firms with bargaining power. One of the downstream firms (the “chain store”) can integrate backward at lower cost than rivals. Bargaining powers also depend on disagreement profits, bargaining weights, and concession costs. If the chain's integration threat is not credible, price discrimination reduces the input price charged symmetric downstream firms and often reduces the average input price charged asymmetric downstream firms.     

Pricing and commitment by two‐sided platforms

I study pricing and commitment by platforms in two‐sided markets with the following characteristics: (i) platforms are essential bottleneck inputs for buyers and sellers transacting with each other; (ii) sellers arrive before buyers; and (iii) platforms can charge both fixed fees and variable fees (royalties). I show that a monopoly platform may prefer not to commit to the price it will charge buyers at the same time it announces its seller price if it faces unfavorable seller expectations. With competing platforms, commitment makes the existence of an exclusive equilibrium (in which sellers register with only one platform) less likely, but it has no impact on multi‐homing equilibria (in which sellers support both platforms) whenever these exist.     

A Group Utility Maximizer Mechanism for Land Assembly

Buyers requiring large parcels of land for development purposes engage several owners in a bilateral trade seeking monetary payment in exchange for land – a business transaction most often referred to in the literature as the problem of land assembly. To avoid the holdout problem which is a typical consequence of such negotiations necessitates a good pricing strategy that meets the subjective valuation considerations of the owners and protecting property rights to warrant a fair and efficient outcome. Several approaches have been proposed in the literature that includes contributions from game theory in the form of Nash bargaining, Bayesian theory for incomplete information, auction theory and Mechanism Design which have individually enriched this field and proposed credible solutions. In this paper, we consider a setting that has a single buyer and N sellers. We take a Mechanism Design approach to study the assembly problem in a utilitarian framework, where we associate risk-averse utility functions with the sellers. Given a set of reserve prices reported by sellers, and their risk-aversion behaviour, we seek an incentive-compatible mechanism that simultaneously maximizes the sum of individual expected utilities while delivering a Pareto optimal per-seller penalty-reward structure. We show how this mechanism, inspired and adapted from the actuarial Risk Exchange concept in the Insurance industry, can be fruitfully applied to the land assembly problem, yielding an efficient and optimal solution to the holdout problem, while making very minimal demands on knowledge of sellers valuations. The working of the mechanism is illustrated with a simple example.     

Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability

While it is known that information exchange (IE) in a value chain improves resource coordination, scant attention has been paid to two issues. The first issue is the effect of relative bargaining strengths of the parties on whether and how IE will be implemented. The second issue is whether a resource-based costing system is adequate to motivate the implementation of information exchange. In this paper, we model a value chain consisting of a manufacturer and a retailer, where the retailer gets (private) demand information that has the potential of improving the manufacturers resource decisions. In this model, it is always beneficial for the value chain to implement IE. We show that in a monopsony or in a bilateral monopoly when the retailer has sufficient bargaining power, IE can be implemented if and only if the wholesale price compensates him for the loss of the information rent that he would get without IE. Using this model as the benchmark, we also examine other settings where the retailers have less bargaining power due to competition or size. In such settings, even though the retailers are better informed, the manufacturer can implement the IE regime costlessly and appropriate the information rent partially or fully. In effect, the manufacturer benefits both by improved resource coordination and by reduced payment for information rent. In all these settings, we find the retailer will not be motivated to adopt IE solely by a resource-based costing and pricing system.     

The Impact of Hurricane Mitigation Features and Inspection Information on House Prices

This paper examines the effect of hurricane mitigation features and their verification on the transaction prices of single-family homes. Some of these features are obvious to buyers and sellers (visible) and others are not easily observed (hidden). Prior research on the relationship between mitigation features and house prices has implicitly assumed the features are known and that buyers and sellers are equally informed. This paper contributes to the literature by examining the potentially different effects of the visible and hidden features, and the verification of each by professional inspection, on prices in an environment of incomplete and asymmetric buyer-seller information. Generally, findings are consistent with expectations – that visible mitigation features are positively correlated with price increases; that the effects of the visible and hidden features on price differ significantly; and that inspection information significantly increases the implicit price of hidden features. Interestingly, the inspection is found to also increase the implicit price of the set of visible features, suggesting the implicit prices of characteristics that are, or should be, visible to buyers and sellers may be affected by verification or disclosure.     

The Effect of Reputation and Competition on the Advice of Real Estate Agents

We study a two-period bargaining game where buyers and sellers employ real estate agents to help them determine the sales price of a house. We find that agents are less likely to provide aggressive bargaining advice to their client when they receive percentage commissions and when they work for the buyer. In addition, we find that agents are less likely to suggest aggressive bargaining strategies when there is little market competition, the gains to trade are large, in markets where housing values appreciate slowly, and when dual agency is permitted. More importantly, we show that an agent is more likely to bargain aggressively and capture a portion of the gains to trade for a client when the house’s sales price is closely related to the agent’s reputation and future business (referrals).

Short Selling and Intraday Price Pressures

We study episodes of significant intraday downward price pressures in individual stocks and find that price declines during such episodes are driven mainly by liquidity demanding nonshort volume. Although short sellers during these price pressure episodes are also active and somewhat exacerbate the magnitude of price declines, their influence on prices is secondary to that of nonshort sellers. As such, our findings are inconsistent with the recently reignited allegations of systematic trading abuses caused solely by short sellers and might shed light on the debate regarding the need to reinstitute short selling restrictions.     

Share Holder Wealth Effects of Corporate Selloffs: Impact of Growth Opportunities, Economic Cycle and Bargaining Power

Most of the existing empirical evidence on corporate selloffs documents significant wealth gains for the seller's shareholders. We investigate the sources of these wealth gains by examining the impact of business and financial strategy, the economic environment during selloff, and the bargaining advantages of the seller including information asymmetry. We find evidence that sellers with growth opportunities and financially strong sellers enjoy higher returns. Selloffs during recessions generate larger wealth gains than those during economic boom. Information asymmetry due to the buyer's location being different from the purchased division's gives the seller a bargaining advantage leading to larger wealth gains. Relatively large divestments are more beneficial to seller shareholders than small ones. The study highlights the importance of both firm specific and environmental factors in explaining the wealth gains associated with corporate selloffs.     

Single-family housing transactions: Seller motivations, price, and marketing time

Factors such as relocation and financial distress motivate the seller of a single-family home to facilitate sale by posting a lower list price, communicating the motivations to the marketplace, or offering sales incentives to agents. Impacts of seller motivations on selling prices and marketing times are estimated using data for single-family homes sold in Arlington, Texas, from 1991 to 1993. Results show selling price discounts for houses with sellers who are either eager, motivated, or anxious, houses with sellers who have relocated, foreclosures, and vacant houses. Only foreclosure houses show the reduced marketing time expected for properties with motivated sellers. The results further suggest that the list price is the seller's primary mechanism for selling the property. Reducing the list price fosters faster sales at the sacrifice of the selling price.     

Days on market and home sales

In 2006, Massachusetts adopted a new policy that prohibits home sellers from resetting their properties’ days on market through relisting. Massachusetts homes exposed to the policy change experienced a $16,000 reduction in sale price relative to Rhode Island homes. Slow‐moving homes suffered a greater reduction, but newer listings only had a small increase in sale price. One reason is that some buyers were unaware of sellers’ manipulation of days on market and thus unable to recognize authentically new listings. Sellers reacted to the new policy by cutting listing prices, although in towns where listing price history was transparent, sellers raised listing prices to dampen the stigma of slow sales.