Information Economics with Real Estate Applications

Chapter 7 Hidden characteristics and adverse selection

This chapter focuses on hidden characteristics, the resulting inefficiencies and potential ways to mitigate them before agreeing to a contract. We distinguish between two scenarios: hidden characteristics in principal-agent relationships (such as selection of service providers or employee recruitment) and hidden characteristics in other contractual relationships (e.g., lease agreements, property insurances and asset transactions).

7.1 Introduction

Transparency is key to the efficient operation of markets. As in many other sectors, this is also true for the real estate and construction industry. To compete against other, more transparent asset classes such as stocks or bonds in the allocation ...