Abstract
In this paper, we examine how the new house premium has changed over time. We propose that the new home premium can largely be attributed to the “lemons problem” from Akerlof (1970). Recent research suggests that the growth of the Internet has significantly reduced the lemons problem for many products. Our results suggest that the new house premium is about 5.6% without considering time-on-the-market (TOM) and has been declining. This premium ranges from 14.6% (1998) to −2.8% (2010). The average new house premium is 13.3% considering TOM, and ranges from 22.5% (1998) to 5.0% (2010). A trend analysis reveals that new house premiums have fallen 0.8%–0.9% annually, consistent with the Internet, information sharing, and reputation feedback mechanisms reducing the lemons problem associated with asymmetric information.
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