Productive Signaling Equilibria and Over-Maintenance: An Application to Real Estate Markets

Productive Signaling Equilibria and Over-Maintenance: An Application to Real Estate Markets When there is asymmetric information regarding the quality of a traded durable asset, the informed seller might signal asset quality to prospective uninformed buyers by investing in improvements and maintenance. In contrast to Spence (1973), however, this signal may be productive. We derive conditions of signal productivity under which signaling separating, signaling pooling, and no-signaling pooling equilibria persist. We examine welfare implications of the model and identify the over-investment in maintenance effect that persists in efficient markets with asymmetric information and productive signaling. Furthermore, we conduct comparative statics analysis of the results and show the range of parameter values in which a particular equilibrium is attained. While the model and its outcomes apply to various durable assets, we particularly refer in the analysis to real estate markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Productive Signaling Equilibria and Over-Maintenance: An Application to Real Estate Markets

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/B:REAL.0000011156.45979.47
Publisher site
See Article on Publisher Site

Abstract

When there is asymmetric information regarding the quality of a traded durable asset, the informed seller might signal asset quality to prospective uninformed buyers by investing in improvements and maintenance. In contrast to Spence (1973), however, this signal may be productive. We derive conditions of signal productivity under which signaling separating, signaling pooling, and no-signaling pooling equilibria persist. We examine welfare implications of the model and identify the over-investment in maintenance effect that persists in efficient markets with asymmetric information and productive signaling. Furthermore, we conduct comparative statics analysis of the results and show the range of parameter values in which a particular equilibrium is attained. While the model and its outcomes apply to various durable assets, we particularly refer in the analysis to real estate markets.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 18, 2004

References

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