Developers, Herding, and Overbuilding

Posted: 16 Nov 2011

See all articles by Gregory DeCoster

Gregory DeCoster

Bowdoin College

William C. Strange

University of Toronto - Rotman School of Management

Date Written: November 15, 2011

Abstract

Recent years have seen the most pronounced turbulence that real estate markets have ever experienced. There have been wild swings in prices, a wave of foreclosures, countless failed investments, and massive overbuilding. This paper will be primarily concerned with overbuilding. Of the many forces that may have combined to produce this situation, the paper will focus on rational overbuilding carried out by developers whose decisions are made under uncertainty. We will establish the possibility of both statistical and reputation-based herding. The former refers to developers learning from each other, and so tending to copy. The latter refers to developers copying each other in order to reduce the probability of a loss of reputation that can result from asking an unconventional choice.

Keywords: Overbuilding, Herding, Information cascades

JEL Classification: R0, G01

Suggested Citation

DeCoster, Gregory and Strange, William C., Developers, Herding, and Overbuilding (November 15, 2011). Journal of Real Estate Finance and Economics, Vol. 44, Nos. 1 & 2, 2012, Available at SSRN: https://ssrn.com/abstract=1959972

Gregory DeCoster

Bowdoin College ( email )

Brunswick, ME 04011
United States

William C. Strange (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/%7Ewstrange/

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