Interpreting China’s overbuilding through a behavioral perspective: The role of developers’ excessive optimism

Abstract

ABSTRACT Few studies have examined the psychological factors that shape real estate developers’ overbuilding behaviors in China. Through a behavioral lens, this study explores the effect of developers’ excessive optimism on the formation of overbuilding in Ordos City, China. It finds that excessive optimism, manifested by the firm yet unjustified belief in a long-lasting real estate boom, was prevalent among developers who built vacant and unfinished new residential projects in the Dongsheng District, Ordos. It also discovers the crucial roles of the pro-growth local governments and the booming real estate market—including the easy availability of credit, especially the pervasive informal finance—in reinforcing developers’ excessive optimism in Dongsheng. This study confirms the positive effect of market booms on investors’ excessive optimism. Moreover, it sheds light on the role of the state in shaping excessive optimism and reveals that the state’s proactive participation and investment in market transactions can reinforce developers’ over-optimism. This article suggests that studies on excessive optimism should adequately consider its socioeconomic and politico-institutional settings. This study verifies the validity and necessity of adopting a behavioral perspective to interpret China’s overbuilding and calls for further inquiry into the underexplored scholarship at the intersection of behavioral science and real estate development in China.