Price Dispersion in Farmland Markets: What Is the Role of Asymmetric Information?

Stefan Seifert,Silke Hüttel,Christoph Kahle

doi:10.1111/ajae.12153

Abstract

This article investigates the role played by information, search, and bargaining cost in agricultural land markets to explain price dispersion. Based on a hedonic model under incomplete information, we build a two‐tier stochastic frontier. By linking costs of being information deficient to agent characteristics such as degree of professionalism, we identify relative price effects of buyer and seller types related to information deficiency. We compile a comprehensive data set of more than 10,000 transactions in Saxony‐Anhalt, Germany, between 2014 and 2017. We find institutional sellers to achieve the lowest losses resulting from information deficiency and sell with mark‐ups, whereas other sellers incur losses. This seller group could benefit from investments in professionalism and roughly halve their cost of being information deficient. Tenant buyers can benefit from informational advantages resulting in markdowns with lowest effects in the harvest season. We conclude that Germany's policy makers can do more to support market transparency.

Highlights

The agricultural structure and the farmland market in eastern Germany, where SaxonyAnhalt is located, have been influenced by expropriation, land collectivization, and socialist policies
Concluding remarks Within this article we investigate the role of asymmetric information and search cost in the price formation in thin farmland markets
We analyze how the asymmetries related to buyer and seller characteristics can explain price dispersion for the same fundamental value

Summary

Introduction

The agricultural structure and the farmland market in eastern Germany, where SaxonyAnhalt is located, have been influenced by expropriation, land collectivization, and socialist policies. Many large farms were located in Saxony-Anhalt due to the highly fertile farmland. As they have been primarily subject to expropriation after 1945, the share of land to be privatized after the German reunification in 1990 was high compared to other eastern German states. In 2016, farms in eastern Germany were about 223 hectares on average and operated at 67.5 percent rental land (BMEL 2018b). Farms in Saxony-Anhalt were 270 hectares on average, which is the second highest regional average in Germany, and operated at a high land lease share of around 72 percent (StaLa 2017). Since 2010, contrary to western Germany, rental shares have been decreasing since 2010 in eastern Germany (BMEL 2018a)

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