How do Optimal Reserves Compare to Actual Undisclosed Reserve Prices? Empirical Evidence from English Open Outcry Auctions of Residential Property

Simon Stevenson and James Young

ERES from European Real Estate Society (ERES)

Abstract: The empirical analysis of auctions has frequently been constrained by data limitations. This is especially so with respect to undisclosed reserve prices. As a result, it has often been difficult to empirically consider some of the key theoretical arguments regarding the impact and role of reserve prices. Using a dataset that includes information on the undisclosed reserve prices, this paper examines residential property auctions in Dublin, Ireland. The Irish market provides an interesting case to consider the dynamics of the auction process and specifically the optimal reserve price.The analysis is based on a range of primarily theoretical pieces that have considered the optimal value of the reserve, especially when undisclosed (e.g. Riley & Samuelson, 1981; McAfee & Vincent, 1992; Vincent, 1995; Li, Perrigne & Voung, 2003; Caillaud & Mezzetti, 2004; Hu et al., 2010). The primary piece of the literature that has considered real estate in this context is McAfee, Quan & Vincent (2002). The data set utilized in this study consists of 389 properties that were offered for sale through auction between 1998 and 2002. Importantly, this data includes information on variables often missing from existing empirical work, including the undisclosed reserve, the attendance at the auction, the number of bids and bidders and the individual auctioneer presiding. A key advantage in this dataset is that unlike many papers (e.g. Ong et al., 2005) we do not have to rely on proxies to capture the impact of different factors. In addition, due to the nature of the auction procedure followed in Ireland, we are largely considering willing sellers. Therefore, unlike papers such as DeBoer et al. (1992) and McAfee et al. (2002), our reserve estimate is based on perceived market value and not related to issues such as outstanding mortgage debt or unpaid tax. This allows us to directly compare the theoretical optimal reserve with the actual undisclosed reserve in the market place.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2015-07-01
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