Simultaneous Versus Sequential Learning of Valuations: Theory and Evidence From House Sales

Eberhard Feess (), Arthur Grimes, Yigit Saglam () and Ansgar Wohlschlegel
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Eberhard Feess: School of Economics and Finance, Victoria University of Wellington
Yigit Saglam: School of Economics and Finance, Victoria University of Wellington

No 2024-06, Working Papers from Swansea University, School of Management

Abstract: We consider sequential negotiation with bidders as a means for sellers to encourage bidders' acquisition of costly information. Such a mechanism comes at a cost for the seller as she is unable to screen bidders' ex-post information. We show theoretically that this mechanism dominates a standard auction with binding bids if information is sufficiently costly. We analyze a dataset of 1341 house sale transactions in New Zealand, where standard auctions coexist with negotiation-type mechanisms that allow sellers to approach potential bidders sequentially. In line with our theory, we find that sellers are more likely to choose negotiations to sell idiosyncratic houses, for which the willingness to pay is harder to assess. Using a range of instruments for the mechanism choice in an endogenous treatment model, we show that the difference in sellers' revenue between negotiations and auctions increases with idiosyncrasy. Our findings may carry over to other settings which feature substantial information costs such as business sales or license auctions.

Keywords: Auctions; Sequential Negotiations; Indicative Bidding; Real Estate Sales; Choice of Sale Mechanisms (search for similar items in EconPapers)
JEL-codes: C57 D44 R31 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2024-05-01
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