Construction and Sale Decisions of Real Estate Developers Under Heterogeneous Beliefs

We develop a theoretical model that studies the effects of construction and sale decisions as a result of real estate developers' heterogeneous beliefs on demand uncertainty. Our model shows that optimistic developers construct more houses when facing higher uncertainty, while pessimistic developers construct less. Furthermore, small housing quality differentiation leads to lower pricing power of developers. Entrance of new developers into the market does not necessarily yield higher total supply. This paper provides additional insights to puzzling phenomena in real estate markets such as overbuilding, inventory holding