An Improved Approach for Constructing the Real Estate Price Index with Bargaining Effect

Abstract

Bargaining game is ubiquitous in real estate markets due to its heterogeneity. Price index, the most important measurement the market condition, constructed with current approaches however cannot consider the effect of bargaining. Therefore, in this work, we provide a construction of price index including sellers’ bargaining power based on Nash bargaining theory and Heckman’s two-step regression. The sellers’ bargaining power is estimated from the aggregate data of list-price, sale-price and time-on-the-market. Using this method, the residential price index of an empirical example was conducted. The results are in reasonable agreement with the realistic situations, verifying the feasibility and applicability of the developed method.