Buyer Exuberance and Price Premium

Abstract

It has been demonstrated that the real estate market disciplines irrational price premiums. However, the persistence of price premiums begs the question of what causes price premiums in the first place. This paper seeks to examine two explanations for price premiums—the conventional information asymmetry explanation and the buyer exuberance explanation as motivated by behavioural studies. The results show that information asymmetry explains price premiums, and this finding is robust across two sub-hypotheses tested—namely, information differences arising from market familiarity and product characteristics. In addition, we find that price premiums are also caused by buyer exuberance, specifically, exuberance arising from representativeness, purchasing power and anchoring effects.