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Developers, Herding, and Overbuilding

  • Gregory P. DeCoster
  • William C. Strange
Article

Abstract

Recent years have seen the most pronounced turbulence that real estate markets have ever experienced. There have been wild swings in prices, a wave of foreclosures, countless failed investments, and massive overbuilding. This paper will be primarily concerned with overbuilding. Of the many forces that may have combined to produce this situation, the paper will focus on rational overbuilding carried out by developers whose decisions are made under uncertainty. We will establish the possibility of both statistical and reputation-based herding. The former refers to developers learning from each other, and so tending to copy. The latter refers to developers copying each other in order to reduce the probability of a loss of reputation that can result from making an unconventional choice.

Keywords

Overbuilding Herding Information cascades 

JEL Codes

R0 G01 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Department of EconomicsBowdoin CollegeBrunswickUSA
  2. 2.Rotman School of ManagementUniversity of TorontoTorontoCanada

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