TITLE:
Real Estate Pricing under Two-Sided Asymmetric Information
AUTHORS:
Jeremy Sandford, Paul Shea
KEYWORDS:
Asymmetric Information; Game Theory; Information
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.4,
July
17,
2013
ABSTRACT: What happens when a buyer and a seller each
have private information about the value of an item for trade, as is particularly
common in real estate? We solve for the equilibrium price under both public information, where the seller shares
his information with the buyer, and private
information, where the seller is constrained to be unable to credibly
share. Our main results are 1) even under public information, the equilibrium
price differs from the expected value of the item, 2) under private information,
prices follow a step function, with small changes in information generically having
no effect on price, and 3) equilibrium price is more sensitive to informational changes under private information
than public information. This under-studied game of 2-sided asymmetric
information reasonably describes real estate transactions.