CONTINGENT PRICE CONTRACTS AND THE EFFICIENCY OF HOUSING MARKETS

Frequently, the response of housing markets to a large negative demand shock is a period during which the liquidity of housing declines, but the price at which transactions take place changes little. In this pa per we show that a decline in liquidity can result from the inabilitie s of sellers and buyers to insure against post-shock price uncertainty . We conclude, that the introduction of a risk-sharing contingent pric e contract may increase the post-shock liquidity of housing by providi ng insurance against post-shock price uncertainty. Finally, we show th at a mutually agreeable contingent price contract will always exist, e ven when sellers are excessively optimistic.