Can the Mortensen-Pissarides Model Match the Housing Market Facts?

By Gaetano Lisi

http://d.repec.org/n?u=RePEc:eec:wpaper:1312&r=dge

In the housing markets three basic facts have been repeatedly reported by empirical studies: the existence of price dispersion, the positive correlation between housing price and time-on-the-market, and between housing price and trading volume. Since housing markets are characterised by a decentralised framework of exchange with important search and matching frictions, this paper examines whether the baseline search and matching model can account for these three basic facts. We find that the standard matching framework allows to obtain a direct relationship between market frictions and house prices which represents the key mechanism to explain the basic facts of the housing market.

This remarkably short paper shows that it does not take much to match the three principal facts of the housing market. Yet, I do not think search models have been much exploited to study housing markets. I hope this paper will encourage more people to pursue this research agenda.

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