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A model of real estate auctions versus negotiated sales

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  • Christopher J. Mayer

Abstract

Real estate auctions have grown substantially in recent years, emergingas an alternative sales method for many institutions interested in sellinglarge amounts of property quickly. This paper develops a framework for comparing auctions to the more traditional negotiated sales. The model showsthat auctions will sell property at a discount because a quick sale results in a poorer "match" between house and buyer, on average, than could be obtained by waiting longer for a buyer. Furthermore, the model predicts that auction discounts should be larger in a down market with high vacancies, and in a smaller market with fewer buyers and sellers, when there is a larger difference between houses. Finally, the auction discount is smaller when property is more homogeneous, because the match between buyer and house matters less in the final price. Many of these results are verified empirically in other research.

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File URL: http://www.bostonfed.org/economic/wp/wp1993/wp93_3.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 93-3.

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Date of creation: 1993
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Publication status: Published in Journal of Urban Economics 38 (July 1995): 1-22.
Handle: RePEc:fip:fedbwp:93-3

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Keywords: Real property;

References

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  1. Kenneth Hendricks, 1990. "Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price," Discussion Papers 910, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Butters, Gerard R, 1977. "Equilibrium Distributions of Sales and Advertising Prices," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 465-91, October.
  3. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  4. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  5. Christopher J. Meyer, 1993. "Assessing the performance of real estate auctions," Working Papers 93-1, Federal Reserve Bank of Boston.
  6. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  7. Adams, Paul D & Kluger, Brian D & Wyatt, Steve B, 1992. "Integrating Auction and Search Markets: The Slow Dutch Auction," The Journal of Real Estate Finance and Economics, Springer, vol. 5(3), pages 239-53, September.
  8. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Ashenfelter, Orley, 1989. "How Auctions Work for Wine and Art," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 23-36, Summer.
  10. Colin Read, 1991. "A Price Dispersion Equilibrium in a Spatially Differentiated Housing Market with Search Costs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(4), pages 532-547.
  11. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  12. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  13. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  14. Milgrom, Paul, 1989. "Auctions and Bidding: A Primer," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 3-22, Summer.
  15. Riley, John G, 1989. "Expected Revenue from Open and Sealed Bid Auctions," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 41-50, Summer.
  16. Hendricks, Kenneth & Porter, Robert H & Wilson, Charles A, 1994. "Auctions for Oil and Gas Leases with an Informed Bidder and a Random Reservation Price," Econometrica, Econometric Society, vol. 62(6), pages 1415-44, November.
  17. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December.
  18. Salant, S.W., 1990. "For Sale by Owner: When to Use a Realtor and How to Price the House," Papers 90-14, Michigan - Center for Research on Economic & Social Theory.
  19. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
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