Testing for Information Asymmetries in Real Estate Markets
59 Pages Posted: 19 Nov 2013 Last revised: 3 Nov 2014
Date Written: October 2014
We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about neighborhood values than buyers, but there are some sellers and some buyers that are better informed than their peers. We propose a new theoretical framework for analyzing such markets with many heterogeneous assets and differentially informed agents. Consistent with the predictions from this framework, we find that changes in the seller composition towards (i) more informed sellers and (ii) sellers with a larger supply elasticity predict subsequent house-price declines and demographic changes in that neighborhood. This effect is larger for houses whose value depends more on neighborhood characteristics, and smaller for houses bought by more informed buyers. Our findings suggest that home owners have superior information about important neighborhood characteristics, and exploit this information to time local market movements.
Keywords: Asymmetric Information, Housing Market, Insider Trading, Competitive Equilibrium, Gentrification
JEL Classification: G14, R21, R32, D53, D82
Suggested Citation: Suggested Citation