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Agency and Bargaining

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Washington B
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Maisy Wong, University of Pennsylvania

Why Disclose Less Information? Toward Resolving a Disclosure Puzzle in the Housing Market

Scott A. Wentland
,
U.S. Bureau of Economic Analysis
Xun Bian
,
Longwood University
Justin Contat
,
Longwood University
Bennie Waller
,
Longwood University

Abstract

We examine the role of information in the housing market, offering both theory and evidence for why we observe variability in information disclosure among property listings. Our initial empirical findings suggest a positive link between sellers disclosing more information about their properties and marketing outcomes (i.e. home prices and liquidity). While intuitive and consistent with the foundational literature on the economics of information disclosure, it raises an interesting puzzle: why do some agents disclose less information, or why do we not observe all properties disclosing the maximum amount of information possible? Analytically, we show that it may be optimal to disclose less information in some circumstances in this market, particularly when homes are more heterogeneous along certain dimensions. Empirically, the data support the prediction that less information disclosure yields positive returns for a sizable subsample of properties. We utilize a unique aspect of real estate microdata, where we can analyze the marketing strategies of real estate agents (when they market their own properties) as compared to their clients, finding that on average agents disclose less information than their clients, particularly when their homes are likely to be more horizontally differentiated. Finally, this study unearths a peculiar variation of information asymmetry stemming from this principal-agent relationship, where the principal can actually easily observe and monitor a dimension of agent effort (i.e. information disclosure), but the relevant asymmetry arises out of a divergence in the knowledge of the optimal marketing strategy for which the expert was hired and possibly the erroneous conflation of effort and information disclosure by clients.

Examining Both Sides of the Transaction: Bargaining in the Housing Market

Darren Hayunga
,
University of Georgia
Henry Munneke
,
University of Georgia

Abstract

This article examines the bargaining power of market participants in the housing market with special interest in the outcomes of individuals compared to real estate agents. Prior studies examine agents’ sales of their own properties and find that they obtain higher prices than their clients, which is notable because it suggests a conflict of interest. In addition to reexamining agents’ sales after correcting for a simultaneity issue, we consider both agents’ sales and purchases of their own properties as well as all other market participants. Agents’ purchases offers direct evidence of their ability to transaction residential real estate while in competition with other market participants. We also examine the interactions between individuals, agents and other market participants such as companies using a bargaining model that mitigates an endogeneity concern inherent in prior studies. The results demonstrate that agents hold bargaining power relative to individuals but not companies. We also find that agents’ are able to buy low and sell high across the economic cycle from 2002 to 2013.

Investor Bargaining Power, Rental Externalities and Housing Prices

Arno Van Der Vlist
,
University of Groningen
Geoffrey Turnbull
,
University of Central Florida

Abstract

In segmented markets for heterogeneous goods, prices reflect a mixture of demand for housing characteristics, bargaining power and market segmentation. This paper integrates bargaining in a search model to investigate bargaining power in segmented markets for housing across investors and owner-occupiers whereby investment property is also subject to a rental externality discount. The Bayesian-Nash solution yields a framework for identifying price effects across market segments, which provides the empirical framework for estimating separate rental externality and bargaining power price effects. We exploit information on the Florida homestead exemption for owner-occupiers to identify sellers and buyers as investors or owner-occupier. Data from Orange County, Florida, over 2000-2012, show the predicted rental and bargaining power effects. The results clearly indicate bargaining power differentials across investors and owner-occupiers. Rental discount and bargaining power effects systematically vary over the housing market cycle, weaker near the market peak and immediately after the most recent crash. In addition, rental and bargaining power price effects vary across types of neighborhoods, both appearing stronger in lower density, older, and structurally homogeneous neighborhoods. We also estimate the models on a matched sample using a propensity score matching model to control for selection bias in rental externality and bargaining power effects across market segments. Correcting for the endogeneity yields similar results for rental externality discounts and investor bargaining power as found without accounting for matched samples. So the rental discount we find is higher than when estimated in the conventional manner ignoring bargaining power effects.

When are Real Estate Flippers Smarter Than the Crowd?

Kuang Kuang Deng
,
Shanghai University of Finance and Economics
Kwong Wing Chau
,
University of Hong Kong
Siu Kei Wong
,
University of Hong Kong

Abstract

Real estate flippers earn higher returns than average traders in the real estate market. By intensively searching for dumb buyers or dumb sellers, they are able to exploit the valuation spread among other market participants and earn abnormal returns. On average, flippers earn a monthly return that is 5.7% higher over the average market returns. Their abnormal returns are dictated by the spread of buyers’ and sellers’ valuation. It is higher when the market price dispersion is higher and there are less comparable transactions on the market. Due to the short sale constraint of the real estate market, flippers enjoy a larger advantage in searching over other market participants when they buy than when they resell. Hence, the major component of their abnormal returns comes from the price concession obtained at purchase, which is also featured by the valuation spread among market participants. Finally, we show that the time-varying searching costs during the holding period affects flippers premiums at resale.
Discussant(s)
Cindy Soo
,
University of Michigan
Wenlan Qian
,
National University of Singapore
Edward Kung
,
University of California-Los Angeles
Tien Foo Sing
,
National University of Singapore
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location