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The Principal-Agent Relationship in Real Estate Brokerage Services

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  • Michael A. Arnold

Abstract

This article investigates the principal-agent relationship between the owner of a house and her real estate broker. The principal's (owner's) problem is to design a contract that induces the agent (broker) to adopt a selling strategy that maximizes the owner's expected return. A sequential search model is utilized to analyze this principal-agent relationship. Three different systems for paying the broker are considered: fixed-percentage commission, flat-fee, and consignment. Both the discount factors of the owner and the broker and the net costs of ownership incurred while attempting to sell the house play a central role in determining the nature of the optimal contract. The analysis demonstrates that the fixed-percentage commission system is the only one of the three systems considered that can induce a first-best, incentive-compatible contract. A numerical analysis provides insights regarding the effect of the fixed-percentage commission system on competition in the real estate brokerage industry. Copyright American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 20 (1992)
Issue (Month): 1 ()
Pages: 89-106

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Handle: RePEc:bla:reesec:v:20:y:1992:i:1:p:89-106

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Cited by:
  1. 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, American Real Estate Society, vol. 20(1), pages 217-278.
  2. Derek G. Stacey, 2012. "Information, Commitment, and Separation in Illiquid Housing Markets," Working Papers, Queen's University, Department of Economics 1289, Queen's University, Department of Economics.
  3. Jonathan Wiley & Leonard Zumpano & Justin Benefield, 2011. "The Limited-Service Brokerage Decision: Theory and Evidence," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 43(3), pages 336-358, October.
  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, Springer, vol. 37(2), pages 147-161, August.
  5. Ken Johnson & Thomas Springer & Christopher Brockman, 2005. "Price Effects of Non-Traditionally Broker-Marketed Properties," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 31(3), pages 331-343, November.
  6. Jonathan Wiley & Justin Benefield & Marcus Allen, 2014. "Cyclical Determinants of Brokerage Commission Rates," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 48(1), pages 196-219, January.
  7. Oz Shy, 2009. "Real estate brokers and commission: theory and calibrations," Working Papers, Federal Reserve Bank of Boston 09-8, Federal Reserve Bank of Boston.
  8. Vickie L. Bajtelsmit & Elaine Worzala, 1997. "Adversarial Brokerage in Residential Real Estate Transactions: The Impact of Separate Buyer Representation," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 14(1), pages 65-76.
  9. 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, American Real Estate Society, vol. 20(1), pages 5-30.
  10. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Nasser Daneshvary & Terrence Clauretie, 2013. "Agent Change and Seller Bargaining Power: A Case of Principal Agent Problem in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 47(3), pages 416-433, October.
  12. 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, American Real Estate Society, vol. 20(1), pages 49-59.
  13. Sirmans, C. F. & Turnbull, Geoffrey K., 1997. "Brokerage Pricing under Competition," Journal of Urban Economics, Elsevier, vol. 41(1), pages 102-117, January.
  14. Thomas Miceli & Katherine A. Pancak & C. F. Sirmans, 2000. "Restructuring Agency Relationships in the Real Estate Brokerage Industry: An Economic Analysis," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 20(1), pages 31-47.
  15. John D. Benjamin & Peter T. Chinloy, 2000. "Pricing, Exposure and Residential Listing Strategies," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 20(1), pages 62-74.

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