Estimating Bargaining Power in Real Estate Pricing Models: Conceptual and Empirical Issues

Abstract

The relative bargaining power of the buyer and seller is a key feature of real estate pricing models. Classic real estate studies have sought to address bargaining effects in hedonic regression models. Prior research proposes a procedure to estimate bargaining effects in hedonic regression models that depends critically on a substitution to eliminate omitted variables bias. This study shows that the proposed solution that is often cited in the real estate economics literature does not solve the omitted variables problem given that both models are merely different parameterizations of the same model, and thus produces biased estimates of bargaining power when certain property characteristics are omitted. A classic hedonic regression model of real estate prices using Corsican apartment data supports our contention, even when the assumption of bargaining power symmetry is relaxed.