Bounded Rational Bidding Decision for Land Auction in the Context of Real Estate Economic Transformation and Upgrading

Abstract

Abstract Unlike the rapid growth period of China's real estate market, full rational bidding decisions can no longer provide a sufficient theoretical basis for developers’ bidding decisions in land auctions under the transforming and upgrading market. Based on the first-price sealed-bid auction, this paper firstly establishes the standard model where bidders are fully rational, then referring to the research results of behavioral finance, creatively proposes two models under the assumption of bounded rationality of bidders to explain the current situation of the land auction, namely the reference utility model and the Subjective decision probability model. And we analyze the differences between the fully rational assumption model and the bounded rationality assumption models by comparing them. The main conclusions are 1) The assumption of bounded rationality is more consistent with the state of the current market; 2) Land grantors should consider developers' profit margins according to the market background; 3) Under the influence of subjective decisions, the competition of cost advantage developers will intensify while the cost disadvantage developers will be indifferent.