The Impact of Imperfect Information on Prices and Qualities: Evidence from the Housing Market

Ralph Bernd Siebert, Purdue University discusses The Impact of Imperfect Information on Prices and Qualities: Evidence from the Housing Market.

ABSTRACT: This study empirically investigates how imperfect information on prices, qualities and search costs affect prices and qualities. We build on a comprehensive dataset on the housing market that encompasses detailed buyer-specific information on mortgages, income and residential status before moving as well as house and neighborhood characteristics of houses they bought. Based on a housing demand model, we find that incomplete information on quality and higher search costs explain an average increase in house prices by $27,800. Moreover, imperfect information on market prices increases prices by $7,900. Less informed buyers also purchase houses with less desirable qualities which explains a price reduction of $19,171. Hence, less informed buyers spend on average $16,529 ($27,800 $7,900-$19,171) more on houses due to imperfect information on prices and qualities. Our study provides insights to the policy debate on imperfect information on prices and qualities, i.e., incomplete information can lead to higher prices and lower qualities.