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

Abstract:

We study the effect of a law mandating disclosure of litigation status of housing projects on house prices in India. Information asymmetries between developers and buyers result in overpricing of litigated houses (lemons). We find that the introduction of the disclosure law led to a 4-6% decline in the prices of lemons relative to non-lemons. Our data on unit-level transactions, project details, and buyer characteristics allowed us to separate out the price effects across housing sub-markets and income groups. Our paper demonstrates that a mandatory disclosure law can have important, pro-efficiency effects in a developing country, and suggests that such laws may be efficient in a regime of low-state capacity.