What happens when a buyer and a seller each
have private information about the value of an item for trade, as is particularly
common in real estate? We solve for the equilibrium price under both public information, where the seller shares
his information with the buyer, and private
information, where the seller is constrained to be unable to credibly
share. Our main results are 1) even under public information, the equilibrium
price differs from the expected value of the item, 2) under private information,
prices follow a step function, with small changes in information generically having
no effect on price, and 3) equilibrium price is more sensitive to informational changes under private information
than public information. This under-studied game of 2-sided asymmetric
information reasonably describes real estate transactions.
Cite this paper
J. Sandford and P. Shea, "Real Estate Pricing under Two-Sided Asymmetric Information," Theoretical Economics Letters, Vol. 3 No. 4, 2013, pp. 220-225. doi: 10.4236/tel.2013.34037.
 D. Friedman and D. Wittman, “Litigation with Symmetric Bargaining and Two-Sided Incomplete Information,” Journal of Law, Economics, and Organization, Vol. 23, No. 1, 2007, pp. 98-126. doi:10.1093/jleo/ewm004
 A. Daughety and J. Reinganum, “Settlement Negotiations with Two-Sided Asymmetric Information: Model Duality, Information Distribution, and Efficiency,” International Review of Law and Economics, Vol. 14, No. 3, 1994, pp. 283-298. doi:10.1016/0144-8188(94)90044-2
 J. Kennan and R. Wilson, “Bargaining with Private Information,” Journal of Economic Literature, Vol. 31, No. 1, 1993, pp. 45-104.
 J. Sandford and P. Shea, “Optimal Setting of Point Spreads,” Economica, Vol. 80, No. 317, 2013, pp. 149-170. doi:10.1111/j.1468-0335.2012.00939.x
 M. Ottaviani and P. Sorenson, “The Strategy of Professional Forecasting,” Journal of Financial Economics, Vol. 81, No. 2, 2006, pp. 441-466.
 J. M. Steele and J. Zidek, “Optimal Strategies for Second Guessers,” Journal of the American Statistical Association, Vol. 75, No. 371, 1980, pp. 596-601.
 A. Yavas, “A Simple Search and Bargaining Model of Real Estate Markets,” Real Estate Economics, Vol. 20, No. 4, 1992, pp. 533-548. doi:10.1111/1540-6229.00595
 A. Yavas and S. Yang, “The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence,” Real Estate Economics, Vol. 23, No. 3, 1995, pp. 374-368.
 V. Crawford and J. Sobel, “Strategic Information Transaction,” Econometrica, Vol. 50, No. 6, 1982, pp. 1431-1451. doi:10.2307/1913390