Optimal Selling Mechanism, Auction Discounts, and Time on Market

Abstract

This article examines the optimal selling mechanism problem in real estate market using mean-variance analysis and downside risk analysis. When sellers can choose between accepting the first offer above a reservation price or auctions (waiting an optimal and fixed time), more risk averse sellers choose auctions and wait a fixed time while less risk averse sellers choose an optimal reservation price and wait a random time. Positive auction discounts are compensated by reduced risks and there exists a connection between liquidity risk and conditional auction discount. More (Less) sellers will choose to sell their houses through auctions in a hot (cold) market or when holding cost increases (decreases). When sellers choose auctions, more risk averse sellers with lower holding cost wait longer and obtain higher sale price. Loss averse sellers unanimously choose the mechanism of setting an optimal reservation price.

Keywords: Selling mechanism, Efficient set, Auction, Mean-value at risk, Loss aversion, Liquidity risk

JEL Classification: R10, G11, C44, D44