Search Costs,Behavioral Biases,and Information Intermediary Effects

In many markets, buyers, sellers, and their agents have differential information about the quality of heterogeneous assets. We study negotiated transaction prices in the commercial real estate market, which is characterized by heterogeneous assets, illiquidity, and highly segmented local markets, all of which increase the importance of asymmetric information in negotiated pricing outcomes. Using 114,588 industrial, multi-family and office sale transactions that occurred during 1997–2011, we document that distant commercial real estate buyers pay, on average, premiums of 4 % to 15 % relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We also examine the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ local market (behavioral biases channel). Our results suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining observed premiums. The use of an intermediary (broker) increases, on average, the acquisition prices of buyers and decreases the disposition prices of sellers by 3 % to 8 %. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.     

Conflicts of interest,information provision,and competition in the financial services industry

In some markets sellers have better information than buyers over which products best serve a buyer's needs. Depending on the market structure, this may lead to conflicts of interest in the provision of information by sellers. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, where price competition influences the ensuing incentives for truthful information revelation. We also compare conflicts of interest in two different firm structures, specialized banking and one-stop banking.     

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.     

Leverage,governance and wealth effects of asset purchasers

We examine a sample of 670 firms that announce asset purchases. We hypothesize that buyer announcement returns should be higher in the presence of better monitoring and better governance. Consistent with the monitoring hypothesis, we find that buyers with higher private debt make purchase decisions that increase shareholder value. Consistent with the governance hypothesis, we find that returns are higher for buyers that have lower antitakeover provisions in place. Consistent with the managerial discretion hypothesis, buyer announcement-period returns increase with buyer leverage. Consistent with the liquidity hypothesis, we find that announcement-period returns decrease with the seller's Z-score, suggesting that buyers benefit from the lower liquidity of assets sold by sellers with lower debt capacity and higher financial distress. We also find that buyer announcement-period returns are directly related to their operating performance in the post-purchase year.     

Short selling,margin buying and stock return in China market

It is well argued that short sellers are informed traders, and short interests predict future stock returns significantly. However, most researches neglect margin buyers, as twin sisters of short sellers, and keep silent about their impact on stock returns. In this article, we demonstrate that margin buyers significantly impact predictive power of conventional short measures. We document that conventional short measures neglecting margin‐buying activities, short interest ratio (SIR) and days to cover (DTC) fail to predict stock return unless our analysis is confined to lightly margin bought stocks. We also show that short‐margin trading ratio (SMTR), revised short measure with consideration of margin buying, predict stock return more sharply. What is more, we can form profitable portfolios by the new short measure.     

Buying reputation as a signal of quality: Evidence from an online marketplace

Seller reputation, generated by buyer feedback, is critical to fostering trust in online marketplaces. Marketplaces or sellers may choose to compensate buyers for providing feedback. Signaling theory predicts that only sellers of high-quality products will reward buyers for truthful feedback, especially when a product lacks any feedback and when the seller is not established. We confirm these hypotheses using Taobao's reward-for-feedback mechanism. High-quality products, especially without established feedback, are chosen for feedback rewards, which cause sales to increase by 36%. Marketplaces and consumers can therefore benefit from allowing sellers to buy feedback and signal their high-quality products in the process.     

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.     

Counterparty risk,central counterparty clearing and aggregate risk

I construct a model of bilateral trading of over-the-counter (OTC) derivatives to study the performance of central counterparty (CCP) clearing. I first show how buyers are exposed to counterparty risk under bilateral clearing. I then show how a CCP can fully insure against counterparty risk through risk-mutualization and achieve full idiosyncratic risk-sharing among market participants. I further demonstrate the impact of aggregate risk on CCP clearing and illustrate a scenario in which the CCP fails to provide full insurance against counterparty risk and full idiosyncratic risk-sharing collapses under severe aggregate risk. To insure against aggregate risk and retain full idiosyncratic risk-sharing, sellers’ capital resource is important on top of CCP mutualization. Finally, I allow buyers to costly search for sellers and study the implications of optimal search effort. I show how a moral hazard problem can arise if effort is unobservable, in which case full CCP insurance against counterparty risk is no longer optimal.     

Price,quality, and reputation: evidence from an online field experiment

We examine the link between price, quality, seller claims, and seller reputation in Internet auctions. After purchasing actual baseball cards and having them professionally graded, we find that some buyers in the online graded market are misled by incredible claims of quality. They pay higher prices but do not receive better quality and, in fact, are defrauded more often. Online seller reputation is effective for identifying good‐faith sellers. But conditional on completed auctions, reputable sellers do not provide better quality. Evidence also suggests that high‐claim sellers target less‐experienced buyers. We attribute these patterns to two loopholes in the eBay rating system. We benefited from the comments of Austan Goolsbee, Raphael Thomadsen, John Shea, Dan Vincent, David Reiley, Larry Ausubel, Peter Cramton, V. Joseph Hotz, Jeff Smith, Jimmy Chan, Vincent Crawford, Mark Duggan, and attendees at numerous seminars and conferences. We are particularly grateful to Seth Sanders and John List for their constructive advice at the early stage of the research, to Timothy Bresnahan, Rachel Kranton, and Thomas Hubbard for their detailed suggestions in reshaping earlier versions, and to Editor Ariel Pakes and two anonymous referees for their careful readings. Special thanks to eight friends who acted as our agents in purchasing baseball cards in retail markets, and to numerous sports card store owners who shared their insights on the sportscard industry. Excellent research assistance from Randy Alexander Moore and Krzysztof Fizyta is gratefully acknowledged. Any remaining errors are ours.     

The anatomy of buyer–seller dynamics in decentralized markets

In this paper I investigate the nexus between buyer–seller dynamics, financial frictions and market efficiency in decentralized markets. To do so, I introduce financial frictions in a dynamic market with heterogeneous traders. Heterogeneously constrained buyers sequentially enter the market to acquire units of a generic good from heterogeneously endowed sellers. I characterize two closely related classes of equilibria, respectively called homogeneous equilibrium with no entry (HEWNE) and homogeneous equilibrium with entry (HEWE). Both equilibria prescribe a market where only the efficiently endowed type of seller exists in the limit. However, the two equilibria diverge in the specification of agents’ behavior subsequent to trade. In HEWNE, sellers and buyers exit the market upon successful trading. In HEWE, like in supply chains, in every period certain types of buyers replace exiting sellers, thus becoming potential sellers for subsequent waves of buyers. First, I identify the critical role of frictions in steering the complex evolution of market heterogeneity for both classes of equilibria. Secondly, I operationalize the combined study of HEWNE and HEWE to obtain sharp predictions on market efficiency for a range of empirically-relevant situations in which buyer–seller dynamics are decoupled, for example when entry of new sellers is delayed or stopped. Third, I test the theoretical findings against a simulated artificial market.     

Why do intermediaries divert search?

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e., inducing consumers to search more than they would like): (i) trading off higher total consumer traffic for higher revenues per consumer visit; and (ii) influencing stores’ choices of strategic variables (e.g., pricing). We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to online and brick‐and‐mortar intermediaries.     

Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium

In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players and the interaction between buyers and sellers. In commodities markets this premium is an important indicator of the behavior of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium. We apply our model to the German electricity market and show that the market risk premium exhibits a term structure which can be explained by the combination of two factors. Firstly, the levels of risk aversion of buyers and sellers, and secondly, how the market power of producers, relative to that of buyers, affects forward prices with different delivery periods.     

GLAMOUR VERSUS VALUE: TRADING BEHAVIOR OF INSTITUTIONS AND INDIVIDUAL INVESTORS

We design a new metric to measure the net buying and selling by institutions and individual investors and find that from 1980 to 2004 institutional investors were net buyers of growth stocks and net sellers of value stocks, implying that individual investors were net buyers of value stocks and net sellers of glamour stocks. The institutional preference for glamour and value stocks seems to be related to sell‐side analysts' recommendations and recent favorable stock price performances, especially during the post‐1994 period. Finally, the institutional buying of growth stocks and sale of value stocks was not based on superior information.     

More on a statistical analysis of log-periodic precursors to financial crashes

In this paper, we extend the existing empirical evidence on the relationship between the state of the limit order book (LOB) and order choice. Our contribution is twofold: first, we propose a sequential ordered probit (SOP) model which allows studying patient and impatient traders’ choices separately; second, we consider two pieces of LOB information, the best quotes and the book beyond the best quotes. We find that both pieces of LOB information explain the degree of patience of an incoming trader and, afterwards, its order choice. Nonetheless, the best quotes concentrate most of the explanatory power of the LOB. The shape of the book beyond the best quotes is crucial in explaining the aggressiveness of patient (limit order) traders, while impatient (market order) traders base their decisions primarily on the best quotes. Patient traders’ choices depend more on the state of the LOB on the same side of the market, while impatient traders mostly look at the state of the LOB on the opposite side. The aggressiveness of both types of traders augments with the inside spread. However, patient (impatient) traders submit more (less) aggressive limit (market) orders when the depth of the own (opposite) best quote and the length of the own (opposite) side of the book increase. We also find that higher depth away from the best ask (bid) quote may signal that this quote is ‘too low (high)’, causing incoming impatient buyers (sellers) to be more aggressive and incoming patient sellers (buyers) to be more conservative.     

Cheap talk, fraud, and adverse selection in financial markets: some experimental evidence

We examine communication in laboratory games with asymmetricinformation. Sellers know true asset qualities. Potential buyersonly know the quality distribution. Prohibiting communication,we document the degree of adverse selection. Then we examinetwo alternative communication mechanisms. Under 'cheap talk',each seller can announce any subset of qualities. Under 'antifraud',the subset must include the true quality. Both mechanisms improvemarket efficiency, but very differently. Relying on sellers'frequently exaggerated claims, buyers often overpay under cheaptalk. Efficiency gains come at the buyer's expense. The antifraudrule improves efficiency further and eliminates the wealth transferfrom buyers to sellers.     

Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions

This paper develops a utility indifference model for evaluating various prices associated with forward transactions in the housing market, based on the equivalent principle of expected wealth utility derived from the forward and spot real estate markets. Our model results show that forward transactions in the housing market are probably not due to house sellers?? and buyers?? heterogeneity, but to their demand for hedging against house price risk. When the imperfections of real estate markets and the risk preferences of market participants are taken into consideration, we are able to show that the idiosyncratic risk premium, which mainly depends on the participants?? risk preferences and the correlation between the traded asset and the real estate, is a remarkable determinant of house sellers?? and buyers?? forward reservation prices. In addition, we also find that the market clearing forward price usually will not converge toward the expected risk-neutral forward price. The sellers?? or buyers?? risk aversion degrees and market powers are also identified to play crucial roles in determining the clearing forward price.     

Methods of Payment in Asset Sales: Contracting with Equity versus Cash

We analyze intercorporate asset sales where equity is the means of payment, and compare the results to cash asset sales. Equity deals are value‐enhancing for both buyers, 10%, and sellers, 3%, while cash sales generate seller returns of 1.9% and buyer returns that are not significant. Combined wealth gains are large for equity deals, but modest for cash deals. Equity‐based asset sales are not a precursor to consolidations between buyers and sellers, and do not affect buyer openness to the takeover market. We conclude that the use of buyer equity conveys favorable information about the value of assets and buyers.     

Endogenous market segmentation for lemons

Information asymmetry between sellers and buyers often prevents socially desirable trade. This article presents a new mechanism that mitigates the inefficiencies caused by information asymmetry. I consider decentralized markets under adverse selection and show that such markets can be endogenously segmented in a way that improves social welfare. Endogenous segmentation is driven by low‐quality sellers’ incentive to attract more buyers by separating from high‐quality sellers. The mechanism helps us understand the roles of several real‐world institutions, such as multiple marketplaces, costless advertisements, and nonbinding list prices.     

Buyer power and mutual dependency in a model of negotiations

We study bilateral bargaining between several buyers and sellers in a framework that allows both sides, in case of a bilateral disagreement, flexibility to adjust trade with each of their other trading partners and receive the gross benefit generated by each adjustment. A larger buyer pays a higher per‐unit price when buyers' bargaining power in bilateral negotiations is sufficiently low, and a lower price otherwise. An analogous result holds for sellers. These predictions, and the implications of different technologies, are explained by the fact that size is a source of mutual dependency and not an unequivocal source of power.     

A model of (the threat of) counterfeiting

A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, lotteries are included. These provide scope for the operation of the intuitive criterion of Cho and Kreps. The application of that refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of producing counterfeits is low enough, then there is no monetary equilibrium. Otherwise, there is a monetary equilibrium without counterfeiting. In other words, the threat of counterfeiting can eliminate the monetary equilibrium.