Trust premium in the second-hand housing market: evidence from the negotiation rate

Abstract

Trust is an important social capital and informal institution that influences transaction behaviors, especially in the second-hand housing market of China. This study analyzes the second-hand housing transactions of 17 cities and matches the birthplaces of these traders with CESS2000 to measure the degree of trust in each transaction. Then we use the combined dataset to examine the impact of the degree of trust on the bargaining power during the negotiation process. The empirical results indicate that there is a significant positive correlation between the degree of trust and negotiation rate, and buyers are more likely to capture trust premium. Moreover, “youth capital” emphasizes the role of trust in price bargaining during the second-hand housing transactions. Local advantage has a substitution effect on trust, which means it is an alternative explanation of trust affecting price bargaining during the second-hand housing transactions. Furthermore, the impact of trust varies by gender with male traders being more affected than female traders. All in all, this study provides practical implications of trust premium in housing transactions, and policy implications of establishing a social credit system. Governments can reduce transaction friction and transaction costs by establishing an appropriate formal institution, such as a personal credit database. As research on trust premium affecting micro-behaviors in the housing market is scarce, this study aims to fill this gap.