Bargaining Behavior in Real Estate Markets

by

Danny Ben-Shahar*, Yuming Fu**, Sau Kim, Lum** and Tsur Somerville***

Paper for presentation at the AREUEA Annual meeting

Boston, Massachusetts on January 6-8, 2006.

This paper applies behavioral economics models to analyze real estate transactions where the outcome depends on multiparty bargaining under asymmetric information. In particular, we examine the possibility of bargaining impasse due to psychological phenomena such as self-serving biases [Babcock and Loewenstein (1997)] and care for fairness [Kagel, Kim and Moser (1996)]. Our sample consists of about 200 attempts at the collective sale of multi-unit properties for redevelopment in Singapore between 1994 and 2004. The success of such collective sales depends on agreement not only between the buyer (developer) and the sellers (unit owners) but also among the individual sellers. We observe 153 successful sales in our sample. We model the probability of success as a function of both psychological factors and rational strategies. We measure the fairness factor as a function of the heterogeneity of the individual properties in a collective sale. We measure the self-serving bias as a function of the uncertainty in the value indicators offered by recent comparable sales. Furthermore, we allow for hold-out incentives that increase with the number of owners in a collective sale [Strange (1995)].

Babcock, L. and G. Loewenstein (1997). "Explaining Bargaining Impass: the Role of Self-service Biases." Journal of economic perspectives 11(1): 109-126.

Kagel, J. H., C. Kim and D. Moser (1996). "Fairness in Ultimatum Games with Asymmetric Information and Asymmetric Payoffs." GAMES AND ECONOMIC BEHAVIOR 13: 100-110.

Strange, William C. (1995). “Information, holdouts, and land assembly,” Journal of Urban Economics 38, 317-332.

* The Arison School of Business, The Interdisciplinary Center, P.O. Box 167, Herzliya 46150, Israel. Email:

**Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566. Email: and

*** Sauder School of Business, University of British-Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2 Canada. Email:

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