Cooling Auction Fever: Underquoting Laws in the Housing Market

Posted: 15 Apr 2020 Last revised: 28 Aug 2021

See all articles by Antonio Gargano

Antonio Gargano

University of Houston - C.T. Bauer College of Business

Marco Giacoletti

Marshall School of Business

Date Written: March 25, 2020

Abstract

This paper presents novel evidence of the effects of bidders’ behavioral biases, and sellers’ strategic responses, on the outcome of high-stakes auctions. We exploit the introduction of laws deterring “underquoting” in real estate auction listings as a natural experiment. Underquoting consists of advertising downward-biased listing prices, to convey distorted signals on sellers’ reservation values and increase auction participation. The laws reduce the bias between auction listing prices and market valuations by 60%, and lead to a relative drop in auction sales prices between 2% and 6%. We conduct further tests exploiting bidding data and listing-level heterogeneity, and provide evidence consistent with higher auction participation inducing overbidding through informational herding.

Keywords: Behavioral Biases, Auctions, House Prices, Herding

JEL Classification: D10, D80, G40, R30

Suggested Citation

Gargano, Antonio and Giacoletti, Marco, Cooling Auction Fever: Underquoting Laws in the Housing Market (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3561268 or http://dx.doi.org/10.2139/ssrn.3561268

Antonio Gargano

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Marco Giacoletti (Contact Author)

Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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