The bid rent model, which is the standard bidding model of housing markets, fails to take account of three important characteristics of the bidding process that operates in these markets: the prices of houses are established through sequential bidding, so that sellers do not necessarily accept the highest bids that might be made for their houses; ignorance of the market may lead potential buyers to make bids that are either higher or lower than the ones they would make if they had complete information; and the distribution of bids for a house is truncated at the seller's asking price. This paper describes a bidding model that incorporates these characteristics of housing markets. The new model and the standard model are estimated econometrically and tested against one another using data from the Baltimore, Maryland, area. The test results indicate strong rejection of the standard model. It is concluded that the new model provides a better description of the operation of housing markets than does the standard model.
ASJC Scopus subject areas
- Economics and Econometrics