Cooling Auction Fever: Underquoting Laws in the Housing Market

63 Pages Posted: 15 Apr 2020 Last revised: 19 Aug 2020

See all articles by Antonio Gargano

Antonio Gargano

University of Melbourne - Department of Finance

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 take advantage of the introduction of real estate “underquoting” laws as a natural experiment. The laws deter the practice of advertising downward-biased listing prices, used to convey distorted signals on sellers’ reservation values and to increase the number of auction participants. The introduction of the laws leads to higher listing prices, reducing the bias between listing prices and market valuations by 60%, and to a relative drop in auction sales prices between 2% and 6%. Our findings are not consistent with the predictions of rational models, since underquoting would only attract bidders with low valuations. However, they are consistent with models in which bidders derive subjective utility from winning a bidding contest, or are prone to herding, since in these settings a bidding process involving a larger number of participants is more likely to induce overbidding.

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 Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Marco Giacoletti (Contact Author)

Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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