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Rational pricing responses of developers to supply shocks: Evidence from Singapore

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  • Diao, Mi
  • Fan, Yi
  • Sing, Tien Foo

Abstract

Singapore's government imposed a new transaction tax in the form of an Additional Buyer's Stamp Duty (ABSD) on developers who fail to sell all units within 5 years for projects that commenced after 2011. We find significant evidence that the ABSD shock triggers rational responses by private developers, who cut prices to clear unsold housing units. Developers of the ABSD-affected projects strategically cut prices by 2.8% to sell units in year 5 relative to other projects that are not subject to the ABSD. We also find that the treatment effects come mostly from three groups of developers, which include large developers, small project developers and local developers. Liquidity constraints and differential reference points are two potential channels that drive the differential price cutting responses of developers to the policy shock in the housing market.

Suggested Citation

  • Diao, Mi & Fan, Yi & Sing, Tien Foo, 2021. "Rational pricing responses of developers to supply shocks: Evidence from Singapore," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 802-815.
    • Handle: RePEc:eee:jeborg:v:190:y:2021:i:c:p:802-815
    DOI: 10.1016/j.jebo.2021.08.025
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    More about this item

    Keywords

    Rational responses; Transaction tax; Liquidity constraint; Reference points; Government intervention; Private Housing Markets;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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