Controlling Auction Failure and Stabilizing Land Price: A Two-Stage Auction Mechanism with Reference Effect

In recent years, in response to China’s high housing and land prices, some local governments have tried to cap the housing price and change land auction rules to contain housing prices. However, large-scale land auction failure is incurred, which poses threats to social financing and sustainability of urban land resources. This paper proposes a two-stage auction mechanism aiming at controlling land auction failure and stabilizing land prices. Based on the first-price sealed auction model, this paper depicts the principle of the current mechanism and analyzes the reason for land auction failure under the housing price cap, and the threshold condition of auction failure is deduced. Then, the equilibrium bidding strategy of developers in the improved mechanism is solved. On this basis, numerical results show that the improved mechanism can control land auction failure and ensure a reasonable land price level at the same time, and the corresponding mechanism design suggestions are given.