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Open Access Publications from the University of California

Market Mechanism Choice and Real Estate Disposition: Negotiated Sale Versus Action

  • Author(s): Gau, George W.
  • Quan, Daniel C.
  • et al.

In this paper, we propose a model of mechanism choice in the disposition of real estate assets. Specifically, we consider two alernatives: a search or negotiated sale and auction. Within the search framework, we derive an equilibrium whereby buyers incur costly search and sellers must incur holding cost for the period the property is not sold. In the auction alternative, the seller joins an existing pool of other sellers in undertaking a sequntial multiple-object auction. Buyers and sellers freely choose their mechanism which in equillibrium is optimal given each group's conjectures about the mechanism choice of their counterparts. In equillibrium, each agent cannot benefit from deviating from his choice and his beliefs are consistent with the equilibrium outcome. It is shown that buyers with high search cost will choose auctions because the auction payoff impose an upper bound on buyers' gain from search. Am empirical model is estimated which tests for price differences due to mechanism choice. Using transaction data on vacant lots from both auctions and negotiated sales, negotiated transactions were found to yield higher prices.

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