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Fifth Bi-National Regional Science Workshop Tel Aviv, April 29 -30, 2007 Re-Redeveloping Downtown: Behavioral Fifth Bi-National Regional Science Workshop Tel Aviv, April 29 -30, 2007 Re-Redeveloping Downtown: Behavioral Bargaining in Real Estate Markets Danny Ben-Shahar Yuming Fu Sau Kim Lum Tsur Somerville Technion – Israel Institute of Technology National University of Singapore University of British Columbia

MOTIVATION Explore (both theoretically and empirically) the sale process of collectively owned residential real MOTIVATION Explore (both theoretically and empirically) the sale process of collectively owned residential real estate for the purpose of redevelopment

OBJECTIVE • Test for determinants of successful collective sales • Analyze the effect of OBJECTIVE • Test for determinants of successful collective sales • Analyze the effect of policies instated to promote sale of buildings for redevelopment • Look for empirical support for theories in behavioral economics

SUMMARY OF THE RESULTS • The greater the number of collective owners, the lower SUMMARY OF THE RESULTS • The greater the number of collective owners, the lower is the probability of a sale and the longer is the sale process • The greater the difference between owners, the lower is the probability of a sale and the longer is the sale process • The greater the redevelopment potential, the higher is the probability of a sale and the shorter is the sale process

THE GAME Bargaining among owners on the expected price and its division Agent believes THE GAME Bargaining among owners on the expected price and its division Agent believes the expected price is reasonable Agent believes the expected price is too high Bargaining between the owners and the buyer We do not observe Bid price > expected price Bid price< expected price Bargaining among owners on the division of the positive surplus Agreement among owners Sale Bid price = expected price Bargaining among owners on the division of the negative surplus Disagreement Agreement among owners No Sale Disagreement among owners No Sale

RELEVANT LITERATURE - I Land Assembly w/ landowner heterogeneity Eckart (1985) and Strange (1995) RELEVANT LITERATURE - I Land Assembly w/ landowner heterogeneity Eckart (1985) and Strange (1995) assume players are rational and predict: – Higher land price (per sqf) for small parcels (due to lower opportunity cost of failure) – Land prices for assembly rise w/ number of lots to assemble

RELEVANT LITERATURE - II Behavioral Economics (Self-Serving Assessment of Fairness) – Babcock and Loewenstein RELEVANT LITERATURE - II Behavioral Economics (Self-Serving Assessment of Fairness) – Babcock and Loewenstein (1997) – People evaluate information in ways that are beneficial to one’s own outcome – More likely in situations where there is ambiguity Experimental support from the “ultimatum” game: • Hoffman et al. (1994), Knez and Camerer (1995), and Kagel et al. (1996) Empirical support from union contracts: • Babcock, Wang, and Loewenstein (1996) - strikes more likely the larger the spread of comparable wages • Thompson and Loewenstein (1992) - difference between management and labour’s assessment of “fair” settlements correlated with strike length • Babcock and Olson (1992) - each side to a labour dispute picks a “fair” reference focal point that is favorable to itself

THE MODEL • • • N landowners Share of each owner is αi ( THE MODEL • • • N landowners Share of each owner is αi ( ) Owners total reservation price is B Buyer’s offer is P The issue is the division of P–B: – No problem when P=B – Problem arises with positive surpluses P>B and negative surpluses P

SELF-SERVING BIAS OF “FAIR” DIVISION Suppose α 1=33% and α 2=67% then: If P<B SELF-SERVING BIAS OF “FAIR” DIVISION Suppose α 1=33% and α 2=67% then: If PB β 1=50% and β 2=67% where βi is the owner’s subjective share in the positive and negative surpluses, (P-B) That is, We have under-demand of negative surplus and overdemand of positive surplus

SUBJECTIVE DIVISION RULE SUBJECTIVE DIVISION RULE

PREDICTIONS • Result 1: The sum of the values requested by the landowners increases PREDICTIONS • Result 1: The sum of the values requested by the landowners increases (and thus the likelihood of a transaction diminishes) with the number of relatively “small” landowners, ceteris paribus. • Result 2: The sum of the values requested by the landowners increases (and thus the likelihood of a transaction diminishes) with the variation in the ownership share, ceteris paribus.

DESCRIPTIVE STATISTICS A total of 285 residential projects: Definition of Observed Variables Mean Std. DESCRIPTIVE STATISTICS A total of 285 residential projects: Definition of Observed Variables Mean Std. Dev. Binary indicator of a successful en bloc sale 0. 73 0. 45 Time from DGP release to en bloc sale in months. It is censored at January 2005. 69. 18 43. 05 Market Information. Binary indicator for Central Area 0. 80 0. 40 Number of parcels in an en bloc attempt 25. 88 33. 80 Ownership Diffusion. The ratio of the size of the top two parcels over that of the bottom two parcels in an en bloc attempt 1. 56 0. 86 Redevelopment Potential, equal to the maximum of three ratios: (i) new maximum plot ratio to the existing plot ratio, (ii) new height limit to the existing height limit, (iii) new maximum developable gross floor area to existing gross floor area. It equals 1 for cases with missing data. 3. 10 2. 95 Number of en bloc sale attempts (per project) made 1. 25 0. 53

REGRESSION RESULTS Model Tobit 1 Tobit 2 Tobit 3 Successful Bloc Sale Time to REGRESSION RESULTS Model Tobit 1 Tobit 2 Tobit 3 Successful Bloc Sale Time to Sale 1. 356 (4. 6)*** 47. 932 (4. 3)*** 41. 949 (3. 7)*** 25. 251 (1. 9)* Sale is in Central Area 0. 217 (1. 1) -16. 848 (2. 1)** -19. 738 (2. 4)** -16. 736 (2. 1)** Number of Parcels 0. 5 -0. 065 (2. 0)** 4. 772 (4. 0)*** 4. 902 (4. 1)*** 3. 765 (3. 0)*** Ownership Diffusion -0. 543 (5. 1)*** 21. 515 (5. 1)*** 25. 227 (5. 3)*** 26. 120 (5. 6)*** Redevelopment Potential 0. 354 (3. 0)*** -13. 465 (3. 4)*** -14. 041 (3. 5)*** -15. 217 (3. 9)*** Dependent variable Constant Attempts Probit 14. 588 (2. 5) **

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