Time-on-the-market as a sign of quality

The inferences a prospective home buyer can make about the quality of a house from the amount of time it spends on the market and the seller's optimal strategy in light of these inferences are investigated. Depending upon the information structure, the seller may have an incentive to post an inordinately high initial price (in order to "dampen" the signal transmitted to future prospective buyers) or an inordinately low initial price (in order to make an early sale and avoid consumer "herding"). It is shown that the sellers of high-quality homes do best when inspection outcomes are publicly recorded and do worst when inspection outcomes are not public and the price history is not observable. Costly inspections create more adverse selection but deter consumer herding. © 1999 The Review of Economic Studies Limited.

Duke Scholars

Author Curtis R. Taylor Economics