Cooling Auction Fever: Evidence from the Housing Market

Abstract

This paper presents novel evidence of the effects of bidders’ behavioral biases, and
sellers’ strategic pricing decisions, on the outcome of high-stakes auctions. We study laws
introduced in Australia to limit underquoting, which is the practice of listing houses at
prices below sellers’ reservation values. We show that the laws lead to a relative increase
in listing prices, but to a decrease in sales prices and sales probabilities. We use a model
to link these findings to theoretical predictions based on different assumptions on bidders’
rationality. Our results are consistent with underquoting inducing overbidding through
behavioral channels.

Keywords: Auctions, Behavioral Biases, Housing, Listing Prices, Policy Interventions

JEL Classification: D10, D80, G40, R30