A Statistical Explanation for Extreme Bids in the House Market

Eric J. Levin and Gwilym Pryce
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Eric J. Levin: Department of Urban Studies, University of Glasgow, 25 Bute Gardens, Glasgow, G12 8RS, UK, e.levin@socsci.gla.ac.uk

Urban Studies, 2007, vol. 44, issue 12, 2339-2355

Abstract: This paper proposes a simple statistical explanation for the phenomenon of extreme bids. During a boom, the housing market regime switches from a single bidder to a multiple bidder environment. The sale price in a multiple bidder auction is the maximum bid and the distribution of maximum bids contains a much higher proportion of extreme bids compared with the distribution of single bidder valuations. While this theory does not preclude behavioural explanations of extreme bids, it does demonstrate that a world free from strategic and idiosyncratic behaviour would not be a world free from extreme bids during boom periods. Therefore, when gauging the impact of strategic or idiosyncratic behaviour (either hypothetically or empirically) one has to measure the effect against a baseline regime where extreme bids are inevitable, not against a world that is free from extreme bids.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:sae:urbstu:v:44:y:2007:i:12:p:2339-2355

DOI: 10.1080/00420980701540903

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