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

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Author Info
David Geltner
Brian D. Kluger
Norman G. Miller
Abstract

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. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00537
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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 19 (1991)
Issue (Month): 1 ()
Pages: 1-24
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Handle: RePEc:bla:reesec:v:19:y:1991:i:1:p:1-24

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  1. Hilde Patron & Kenneth Roskelley, 2008. "The Effect of Reputation and Competition on the Advice of Real Estate Agents," The Journal of Real Estate Finance and Economics, Springer, vol. 37(4), pages 387-399, November. [Downloadable!] (restricted)
  2. Richard Arnott & Paul Anglin, 1995. "Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis," Boston College Working Papers in Economics 302., Boston College Department of Economics. [Downloadable!]
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  3. Ronald Rutherford & Thomas Springer & Abdullah Yavas, 2007. "Evidence of Information Asymmetries in the Market for Residential Condominiums," The Journal of Real Estate Finance and Economics, Springer, vol. 35(1), pages 23-38, July. [Downloadable!] (restricted)
  4. Terrence Clauretie & Nasser Daneshvary, 2008. "Principal–Agent Conflict and Broker Effort Near Listing Contract Expiration: The Case of Residential Properties," The Journal of Real Estate Finance and Economics, Springer, vol. 37(2), pages 147-161, August. [Downloadable!] (restricted)
  5. Timothy E. Jares & James E. Larsen & Thomas S. Zorn, 2000. "An Optimal Incentive System For Real Estate Agents," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 49-59. [Downloadable!]
  6. John D. Benjamin & G. Donald Jud & G. Stacy Sirmans, 2000. "Real Estate Brokerage and the Hosting Market: An Annotated Bibliography," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 217-278. [Downloadable!]
  7. John D. Benjamin & G. Donald Jud & G. Stacy Sirmans, 2000. "What Do We Know About Real Estate Brokerage?," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 5-30. [Downloadable!]
  8. R.C. Rutherford & T.M. Springer & A. Yavas, 2004. "The Impacts of Contract Type on Broker Performance: Submarket Effects," Journal of Real Estate Research, American Real Estate Society, vol. 26(3), pages 277-298. [Downloadable!]
  9. Paul K. Asabere & Forrest E. Huffman & Seyed Mehdian, 1993. "Mispricing and Optimal Time on the Market," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 149-155. [Downloadable!]
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