Optimal Price and Selling Effort from the Perspectives of the Broker and Seller

This paper uses numerical solutions of a dynamic optimization model to examine the principal‐agent relationship between the seller and broker in residential real estate markets. Potential conflict of interest is quantified in two dimensions, the level of selling effort the broker puts forth, and the reservation price for the property. The dynamic optimization model reveals that the use of a finite duration listing contract will induce the broker to increase his or her effort level compared to an unlimited duration contract, and that the broker's optimal effort will increase over time, becoming greater as the listing contract expiration time draws nearer (“rational procrastination”). The numerical analysis indicates that with plausible parameter values, conflict of interest problems regarding broker effort level are minor or nonexistent near the end of the listing contract, but potentially important near the beginning of the contract. In contrast, the conflict of interest regarding reservation price is more severe near the end of the listing contract and is exacerbated by the use of finite duration contracts, the more so the shorter the contract.