Do Mandatory Disclosures Squeeze the Lemons? The Case of Housing Markets

Abstract:

In developing countries, potential home-buyers lack accurate information about housing projects. Insecure property rights in developing countries have led to a rise in litigation against these projects. Information asymmetry between developers and buyers about the litigation status results in overpricing of litigated houses (lemons). We find that the introduction of a reform in India, mandating developers to make details about housing projects public, led to a 5%-6% decline in prices of lemons. Our data on unit level transactions, project details, and buyer characteristics enables us to separate out the price effects across housing sub-markets and income groups. The reform led to a decline in prices of lemons only in the non-luxury housing sub-market, and the highest decline for the poorest income quartile. We provide support for mandatory disclosure laws in developing countries by showing that it reduces market inefficiencies and inequality in information access.

Authors: Vaidehi Tandel, Sahil Gandhi, Anupam Nanda and Nandini Agnihotri

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