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Directed Search in the Housing Market∗

Directed Search in the Housing Market∗

Directed Search in the Housing

Directed Search in the Housing Market ∗ James Albrecht † Pieter A. Gautier ‡ Susan Vroman § August 2010 Abstract In this paper, we present a directed search model of the housing market. The pricing mechanism we analyze reflects the way houses are bought and sold in the United States. Our model is consistent with the observation that houses are sometimes sold above, sometimes below, and sometimes at the asking price. We consider two versions of our model. In the first version, all sellers have the same reservation value. In the second version, there are two seller types, and type is private information. For both versions, we characterize the equilibrium of the game played by buyers and sellers, and we prove effi ciency. Our model offers a new way to look at the housing market from a search-theoretic perspective. In addition, we contribute to the directed search literature by considering a model in which the asking price (i) entails only limited commitment and (ii) has the potential to signal seller type. Key Words: Directed Search, Housing JEL codes: D83, R31 ∗ This paper has benefited from comments received at several seminars and conferences. We particularly thank V. Bhaskar and Ludo Visschers. We also thank Mike Peters for helpful correspondence on the material treated in Section 3.4. † Georgetown University and IZA ‡ Vrije Universiteit Amsterdam, Tinbergen Institute, CEPR and IZA. § Georgetown University and IZA 1

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