A Model of Real Estate Auctions versus Negotiated Sales
Revised article published in Journal of Urban Economics 38 (July 1995): 1-22.
Real estate auctions have grown substantially in recent years, emerging as an alternative sales method for many institutions interested in selling large amounts of property quickly. This paper develops a framework for comparing auctions to the more traditional negotiated sales. The model shows that auctions will sell property at a discount because a quick sale results in a poorer "match" between house and buyer, on average, than could be obtained by waiting longer for a buyer. Furthermore, the model predicts that auction discounts should be larger in a down market with high vacancies, and in a smaller market with fewer buyers and sellers, when there is a larger difference between houses. Finally, the auction discount is smaller when property is more homogeneous, because the match between buyer and house matters less in the final price. Many of these results are verified empirically in other research.