Information Provision in the Housing Market

Hong Yu Xiao, Business Economics and Public Policy, The Wharton School

Abstract: Improvements in information technology in recent decades has changed our lives and upended industries. One of its major impacts is to make previously inaccessible information accessible, reduce information asymmetries and improve market efficiencies. However, lowering information search cost also means easier access to lower-quality information, which could negatively affect markets. We propose to empirically analyze the impacts of introducing publicly available heterogeneous-quality information, Zillow’s Zestimate, a free and freely available home valuation tool, on the efficiency of the US housing market via price dispersions. Theoretically, introducing the Zestimate could have two opposing effect. On the one hand, by providing new information that did not exist in the housing market before, Zestimates could give market participants better expectations of the fair market price, thus making the market more efficient, reducing price dispersion. On the other hand, if information quality was low, Zestimates could add noise to the market, distorting people’s expectations and make arriving at the efficient market price harder, thus increasing price dispersion. Combining the two effects, I expect that high-quality information would lead to lower price dispersions and higher market efficiencies, and vice versa for low-quality information.