Do mandatory disclosures squeeze the lemons? The case of housing markets in India

Abstract

What is the impact of mandatory disclosures of quality on market outcomes? Does the impact differ across income groups due to a difference in abilities of buyers to privately resolve information asymmetry? We answer these questions in the context of housing markets in India, where information asymmetry between homebuyers and developers is high and litigation against housing projects is common. We find that a 2017 reform mandating developers to make litigation details public led to a 4 %–6 % decline in prices of litigated housing units (lemons). Litigated units purchased by buyers in the lowest income quartile saw the greatest decline in prices while prices for buyers in the highest income quartile were unaffected. Our results suggest that high-income buyers had private information on litigation, which low-income buyers did not have. We find that the share of units sold in litigated projects declined after the reform, which may be driving developers to reduce prices. We provide support for disclosure laws in developing countries to reduce market inefficiencies and unequal access to information.