Cooling Auction Fever: Underquoting Laws in the Housing Market
Posted: 15 Apr 2020 Last revised: 28 Aug 2021
Date Written: March 25, 2020
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: Suggested Citation