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Search Frictions in Rental Markets: Evidence from Urban China

Author

Listed:
  • Fan, Ying

    (Department of Building and Real Estate, The Hong Kong Polytechnic University)

  • Fu, Yuqi

    (Department of Construction Management, Tsinghua University)

  • Yang, Zan

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

  • Chen, Ming

    (Department of Building and Real Estate, The Hong Kong Polytechnic University)

Abstract

In this paper, we study consumer search in a housing market subject to objective frictions induced by intermediaries and psychological frictions intrinsic to tenants themselves. Using rental data from a leading real estate brokerage company during 2016 and 2018, we find a unimodal distribution of objective search frictions and a bimodal distribution of psychological search frictions revealed by tenants’ search behaviors. This bimodal distribution originates from divergent search strategies of tenants with different search criteria. Furthermore, psychological search frictions explain the deviation between a tenant’s actual choice and stated preference, and enhance the degree of overpay/mark-up in the deal. These effects of psychological frictions led by divergent search strategies hold when we consider the expertise/incentive of agents and the rigidity/opportunity cost of tenants’ search. Aggregately, psychological search frictions result in a dispersed and asymmetric distribution of rent residuals.

Suggested Citation

  • Fan, Ying & Fu, Yuqi & Yang, Zan & Chen, Ming, 2023. "Search Frictions in Rental Markets: Evidence from Urban China," Working Paper Series 23/11, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2023_011
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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