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Eminent Paper Series — Why Do Inventories Rise When Demand Falls In Housing And Other Markets?

Author

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  • EDWARD P. LAZEAR

    (Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015, USA;
    Hoover Institution, 434 Galvez Mall, Stanford University, Stanford, CA 94305-6010, USA)

Abstract

Inventories and price changes are correlated. The inverse relation is most obvious in housing where inventories build in low-demand markets and shrink in high-demand markets. This is a puzzle. Symmetry of information among buyers and sellers would seem to imply that sellers would change their reservation value by the amount that buyers change their offers. Because there is heterogeneity among buyers in the valuation of a given house, sellers set prices strategically. When demand falls, sellers rationally lower their prices, but not by enough to keep the probability of sale constant. As a result, inventories grow.

Suggested Citation

  • Edward P. Lazear, 2012. "Eminent Paper Series — Why Do Inventories Rise When Demand Falls In Housing And Other Markets?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 57(02), pages 1-34.
    • Handle: RePEc:wsi:serxxx:v:57:y:2012:i:02:n:s0217590812500075
    DOI: 10.1142/S0217590812500075
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    References listed on IDEAS

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    1. repec:wop:ubisop:0080 is not listed on IDEAS
    2. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
    3. Adam Copeland & Wendy Dunn & George Hall, 2011. "Inventories and the automobile market," RAND Journal of Economics, RAND Corporation, vol. 42(1), pages 121-149, March.
    4. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
    5. Karl E. Case, 2008. "The Central Role of Home Prices in the Current Financial Crisis: How Will the Market Clear?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 161-193.
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    Citations

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    Cited by:

    1. Weiwei Li & Lisheng Weng & Kaixu Zhao & Sidong Zhao & Ping Zhang, 2021. "Research on the Evaluation of Real Estate Inventory Management in China," Land, MDPI, vol. 10(12), pages 1-29, November.
    2. Eggenberger, Christian & Rinawi, Miriam & Backes-Gellner, Uschi, 2018. "Occupational specificity: A new measurement based on training curricula and its effect on labor market outcomes," Labour Economics, Elsevier, vol. 51(C), pages 97-107.
    3. Lazear, Edward P., 2015. "The impatient salesperson and the delegation of pricing authority," Research in Economics, Elsevier, vol. 69(1), pages 63-74.

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    More about this item

    Keywords

    Housing; inventories; unemployment; vacancies; market; clearing prices; stochastic; demand; D4; R3; M5; L0;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • L0 - Industrial Organization - - General

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