Price dispersion in the housing market: the role of bargaining and search costs
This paper develops a matching model à la Pissarides (2000) in order to explain the basic facts of housing markets, most of all the variance in house prices. Price dispersion is basically due to both the ex-ante heterogeneity of the parties and the search costs of buyers and sellers. In fact, sellers and buyers spend time and money before concluding the deal. Furthermore, the house price is substantially determined by bargaining between the parties. These factors affect the selling price and lead to price dispersion. This simple theoretical model is able to take these distinctive features into account, thus explaining the basic facts of housing markets.
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