Why Sellers Avoid Auctions: Theory and Evidence

Hijacking the auction – seller's or buyer's curse?

“…Propensity score matching was used to further establish the robustness of the results. Assuming that risk aversion among buyers is more prevalent with higher competition, our results support the theoretical explanation of Khezr (2018) that it may be rational for a seller to accept a pre-auction offer when it surpasses their expected auction price. For most households, buying a home is an investment of great economic significance, and understanding the different aspects of the auction is paramount for both buyers and sellers.…”

“…Propensity score matching was used to further establish the robustness of the results. Assuming that risk aversion among buyers is more prevalent with higher competition, our results support the theoretical explanation of Khezr (2018) that it may be rational for a seller to accept a pre-auction offer when it surpasses their expected auction price.…”

“…Thus, the alternative model specification is expected to control for both time-invariant and time-variant factors [4]. Following Khezr (2018), if risk aversion among buyers is the explanation for hijacking, our ex ante prediction is to find a positive hijacking coefficient reflecting the insurance premium paid in order to win the auction. Correspondingly, if risk aversion among sellers is the explanation, we expect to find a negative hijacking coefficient reflecting the discount given in order to secure a sale.…”

“…An offer made by a risk-averse buyer to avoid a risky outcome may be accepted by a seller if it surpasses the expected price of the auction, while a risk-averse seller may accept an offer below the expected price of the auction to avoid a risky outcome. Under these assumptions, Khezr (2018) found equilibriums for both types of behavior and further used empirical data from the Australian real estate market to show an advantage for sellers in pre-action settlements, suggesting risk aversion among buyers.…”

“…One important difference between an online auction with a buyout option and a hijacked property auction, however, is the fact that the seller chooses the buyout price, which is public, whereas the buyer chooses the hijack offer, which is private to the hijacker and seller. To the best of our knowledge, Khezr (2018) is the only study on hijacked property auctions, investigating theoretical justifications for why it may be rational for the seller to accept such a bid before the auction. An offer made by a risk-averse buyer to avoid a risky outcome may be accepted by a seller if it surpasses the expected price of the auction, while a risk-averse seller may accept an offer below the expected price of the auction to avoid a risky outcome.…”