Non-Disclosure of Energy Performance Certificates (EPCs) by House Sellers and Car Certificates (CEBIA) by Car Resellers

• Thesis title in Czech: Nezveřejněné certifikáty EPC ze strany prodejců nemovitostí a certifikáty CEBIA ze strany prodejců aut
• Thesis title in English: Non-Disclosure of Energy Performance Certificates (EPCs) by House Sellers and Car Certificates (CEBIA) by Car Resellers
• Key words: energy performance certificate, real estate, used cars, information assymetry, multiple linear regression, ordinary least squares method, hedonic regression, Czech Republic
• English key words: průkaz energetické náročnosti budovy, nemovitosti, ojetá auta, asymetrická informovanost, mnohonásobná lineární regrese, metoda nejmenších čtverců, hedonická regrese, Česká republika
• Academic year of topic announcement: 2018/2019
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: doc. PhDr. Martin Gregor, Ph.D.
• Author: Hong Quan Tran - assigned by the advisor
• Date of registration: 30.05.2019
• Date of assignment: 30.05.2019
• Date and time of defence: 07.09.2022 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 08.08.2022
• Opponents: Levan Bezhanishvili, M.Sc., Ph.D.

Guidelines

Research question and motivation
Asymmetric information about product quality might lead to missing markets for high quality products (Akerlof, 1970). Such qualities can be verified via certificates. As Milgrom (1981) stated in the “unravelling market theorem” – in equilibrium full disclosure of verifiable quality information arises. In other words, markets force buyers who dispose with certificates to voluntarily reveal them. Milgrom (2008) identified two scenarios of buyers – sophisticated and novices. In the first, sellers might select an test only the qualities that increase the value of their good. In this case, regulations can help to mitigate the costs of nondisclosure. While in the second scenario, according to Milgrom (2008), buyers cannot recognize the relevant information because of the complexity, and regulators should mandate disclosure of the most significant qualities. If, however, buyer’s best decision is unaffected by the information, the sellers will not have incentives to disclose it.

Energy Performance Certificates (EPCs) have been used to balance the information asymmetry in real estate market. EPC indicates verified information about energy efficiency of a dwelling. In the European Union (EU) EPCs disclosure was legally set as compulsory in advertisements for house sellers and lessors. However, not every member state implements the law fully, and the disclosure can become voluntary. Once non-disclosure of a certificate is interpreted as the worst possible quality of the good, each seller prefers to reveal his or her certificate. Yet, once ownership of a certificate is uncertain, buyers cannot impose such strongly disciplining beliefs, and consequently owners of certificates with low values are less motivated to hide the certificates. This is especially true when the certificate is costly. Interestingly, non-disclosure can occur even
in the regime with mandatory disclosure as long as the law allows to make a statement that a certificate is not yet available, hence the good is preliminarily rated with the worst rate. Then, the owners may effectively decide to not purchase the certificate. This can be observed in the case of EPC regulation of houses on the Czech housing market where the mandatory disclosure rule allows sellers to effectively hide the information by announcing that the certificate is not yet ready.

For the used car markets, there exist Car certificates to verify the origin and quality condition of a car. While CarPass disclosure is mandatory in Belgium, Czech CEBIA certificate is on voluntary basis. The sellers can choose to purchase it and then charge a price premium to offset the costs (Montag, 2017). Despite this, only a small number of individual sellers buy CEBIA certificate. On the other hand, it can be observed that mostly large used car dealerships buy these certificates in bulk and raise cars prices. Montag (2017) also described the Czech used car market being infamous for odometer frauds, and so buyers might value a disclosure of CEBIA at price higher than of the cost of one, and might have one issued as a buyer.

The Czech market is unique in a sense that a majority of people live in their own dwellings, and a majority buys pre-owned cars. An average person as a novice buyer will make at least two such purchasing decisions in their life. The purpose of this thesis will be to analyse and compare advertising behaviour of both car and house sellers. The output of this research will be simple game-theoretic models of sellers’ behaviour and an original dataset where this behaviour is detected. Finally, I will discuss whether the Czech consumers behave in such a way that setting CEBIA certificates mandatory would help increase market efficiency and transparency despite the issuing costs.

Contribution
To the best of my knowledge, a research into EPC (non)-disclosure in the Czech market has not been conducted yet. The existing research on different European markets shows mixed findings about price premiums of the certificates (rental effects), and has not focused on the disclosure itself. Firstly, my thesis will discuss the behaviour and find a simple theoretical model of the behaviour. Secondly, as a part of the thesis, an original dataset of house offers where this behaviour is detected, and used car sellers who opted for CEBIA certificate will be created.

References

Akerlof, G. A. (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84:488–500.
Amecke, Hermann, 2012. "The impact of energy performance certificates: A survey of German home owners," Energy Policy, Elsevier, vol. 46(C), pages 4-14.
David Dranove & Ginger Zhe Jin, 2010. "Quality Disclosure and Certification: Theory and Practice," NBER Working Papers 15644, National Bureau of Economic Research, Inc.
Englmaier, Florian & Schmöller, Arno & Stowasser, Till, 2015. "Price discontinuities in an online market for used cars," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 505, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
Jonathan A. Wiley & Len V. Zumpano, 2008. "The Real Estate Brokerage Market and the Decision to Disclose Property Condition Defects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 693-716, December.
Koessler, Frédéric & Skreta, Vasiliki, 2016. "Informed seller with taste heterogeneity," Journal of Economic Theory, Elsevier, vol. 165(C), pages 456-471.
Leemore Dafny & David Dranove, 2008. "Do report cards tell consumers anything they don't already know? The case of Medicare HMOs," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 790-821.
Milgrom, P. R. (1981). Good News and Bad News: Representation Theorems and Applications. The Bell Journal of Economics, 12(2):380–391.
Milgrom, Paul. 2008. "What the Seller Won't Tell You: Persuasion and Disclosure in Markets." Journal of Economic Perspectives, 22 (2): 115-131, Spring.
Montag, Josef, 2017. "Identifying odometer fraud in used car market data," Transport Policy, Elsevier, vol. 60(C), pages 10-23.

Preliminary scope of work

The dataset will check three kinds of research questions:
(i) What are the determinants of the behaviour?
(ii) What are the effects of (non)-disclosures on the posted prices?
(iii) Is there a comparable behaviour of the two groups?

The thesis will also look into EPC and car certificates (e.g. CarPass) regulations in the other countries. I will also compare EPC and other verifiable features of the houses (as technical status of the building) and whether it is possible to sell a house without EPC (if yes, then there could be an issue of ex post bargaining over the cost of EPC). In the end, I will make a recommendation whether a mandatory policy for both markets might be more efficient than free market competition.

Methodology

The challenging part would be to collect relevant data to test the hypothesises. A cooperation with richest databases on the market Sreality.cz and Sauto.cz would be crucial to get large datasets of the advertisements on the Czech market. Bezrealitky.cz will also be used to check the private sellers and if their behaviour differs from the one of the real estate agencies. If in case the dataset was limited, a web-scraping method with Python will be used. I will try to get or collect data over some time period, to adjust for and observe the price changes.

After a model will be created, the test will be a cross-sectional analysis of the available data from the dataset. The determinants of the behaviour will compose of other variables not explicitly mentioned in the advert but accessible elsewhere such as Property Register (e.g., owner location, access to infrastructure etc.). I will also compare the results and will try to match the datasets to test a hypothesis in general.

Outline
1. Abstract

2. Introduction
a. motivation for the topic
b. brief overview of existing knowledge
c. contribution to the topic
d. main findings and interpretation
e. outline of the thesis

3. Literature review and hypotheses
a. literature on determinants of house pricing
b. evidence on the impact of EPC and other certificates
c. game-theoretic model, what hypothesises will be tested
d. motivation why is it reasonable to test them (why there should be a relationship)

4. Methodology
a. relevant description of data
b. possible limitations of the dataset
c. why I use such independent and dependent variables, how they are measured
d. how I perform tests

5. Results
a. rejecting / not rejecting hypotheses
b. my interpretation of the results
c. comparison of the results of both markets

6. Conclusion
a. broader interpretation of results
b. implications for practice
c. topics for further research

Preliminary scope of work in English

The dataset will check three kinds of research questions:
(i) What are the determinants of the behaviour?
(ii) What are the effects of (non)-disclosures on the posted prices?
(iii) Is there a comparable behaviour of the two groups?

The thesis will also look into EPC and car certificates (e.g. CarPass) regulations in the other countries. I will also compare EPC and other verifiable features of the houses (as technical status of the building) and whether it is possible to sell a house without EPC (if yes, then there could be an issue of ex post bargaining over the cost of EPC). In the end, I will make a recommendation whether a mandatory policy for both markets might be more efficient than free market competition.

Methodology

The challenging part would be to collect relevant data to test the hypothesises. A cooperation with richest databases on the market Sreality.cz and Sauto.cz would be crucial to get large datasets of the advertisements on the Czech market. Bezrealitky.cz will also be used to check the private sellers and if their behaviour differs from the one of the real estate agencies. If in case the dataset was limited, a web-scraping method with Python will be used. I will try to get or collect data over some time period, to adjust for and observe the price changes.

After a model will be created, the test will be a cross-sectional analysis of the available data from the dataset. The determinants of the behaviour will compose of other variables not explicitly mentioned in the advert but accessible elsewhere such as Property Register (e.g., owner location, access to infrastructure etc.). I will also compare the results and will try to match the datasets to test a hypothesis in general.

Outline
1. Abstract

2. Introduction
a. motivation for the topic
b. brief overview of existing knowledge
c. contribution to the topic
d. main findings and interpretation
e. outline of the thesis

3. Literature review and hypotheses
a. literature on determinants of house pricing
b. evidence on the impact of EPC and other certificates
c. game-theoretic model, what hypothesises will be tested
d. motivation why is it reasonable to test them (why there should be a relationship)

4. Methodology
a. relevant description of data
b. possible limitations of the dataset
c. why I use such independent and dependent variables, how they are measured
d. how I perform tests

5. Results
a. rejecting / not rejecting hypotheses
b. my interpretation of the results
c. comparison of the results of both markets

6. Conclusion
a. broader interpretation of results
b. implications for practice
c. topics for further research