Market Mechanism Choice and Real Estate Disposition: Search Versus Auction

Daniel C. Quan

Real Estate Economics, 2002, vol. 30, issue 3, 365-384

Abstract: We propose a model of mechanism choice in the disposition of real estate assets where we consider two alternatives: a search market and an auction. Within the search framework, we derive an equilibrium whereby buyers incur search costs and sellers incur holding costs for the period during which the property is not sold. In the auction alternative, the seller joins an existing pool of sellers in undertaking a multiple–object auction and pays a commission upon sale. Buyers and sellers freely choose their mechanisms, which in equilibrium are optimal given each group’s conjectures about the mechanism choice of their counterpart. In equilibrium, an agent cannot benefit from deviating from his choice and each agent’s beliefs are consistent with the equilibrium outcome. It is shown that (a) buyers with high search costs will choose auctions because the auction payoff imposes an upper bound on buyers' gains from search, and (b) prices at auctions will be higher. Using vacant lot sales data and a method–of–moment estimator which accounts for the presence of an endogenous discrete mechanism choice variable, we estimated a hedonic regression to detect the price effect. It was determined that, on average, lots sold for $1.44 per square foot more in auctions than in the search market, as predicted by our model.

Date: 2002
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