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Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis

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  • Paul Anglin
  • Richard Arnott

Abstract

Many people in North America believe that prevailing commission rates for residential real estate brokers are too high, even though such beliefs are not based on a formal model. This paper presents a general equilibrium model of the housing market in which real estate brokers serve as matching intermediaries. We use this model to construct an illustrative example which is calibrated using data consistent with a typical housing market. The example suggests that the commission rate which maximizes aggregate efficiency is considerably below the prevailing rate. Moreover, this finding appears to be robust to changes in the matching process. 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): 27 (1999)
Issue (Month): 4 ()
Pages: 719-749

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Handle: RePEc:bla:reesec:v:27:y:1999:i:4:p:719-749

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References

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  1. Arnott, Richard, 1989. "Housing Vacancies, Thin Markets, and Idiosyncratic Tastes," The Journal of Real Estate Finance and Economics, Springer, vol. 2(1), pages 5-30, February.
  2. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  3. Anming Zhang, 1993. "An Analysis of Common Sales Agents," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 134-49, February.
  4. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  5. Yongmin Chen & Robert W. Rosenthal, 1993. "Asking Prices as Commitment Devices," Papers 0042, Boston University - Industry Studies Programme.
  6. Thomas J. Miceli, 1989. "The Optimal Duration of Real Estate Listing Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(3), pages 267-277.
  7. Peters Michael, 1994. "Equilibrium Mechanisms in a Decentralized Market," Journal of Economic Theory, Elsevier, vol. 64(2), pages 390-423, December.
  8. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  9. Yavas, Abdullah & Colwell, Peter, 1999. "Buyer Brokerage: Incentive and Efficiency Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 18(3), pages 259-77, May.
  10. Yavas Abdullah, 1995. "Can Brokerage Have an Equilibrium Selection Role?," Journal of Urban Economics, Elsevier, vol. 37(1), pages 17-37, January.
  11. Anglin, Paul M & Arnott, Richard, 1991. "Residential Real Estate Brokerage as a Principal-Agent Problem," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 99-125, June.
  12. Anglin, Paul M., 1993. "A note concerning a competitive equilibrium in the market for agents," Economics Letters, Elsevier, vol. 41(3), pages 247-252.
  13. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Richard Arnott, 1997. "Rent Control," Boston College Working Papers in Economics 391., Boston College Department of Economics.
  15. David Geltner & Brian D. Kluger & Norman G. Miller, 1991. "Optimal Price and Selling Effort from the Perspectives of the Broker and Seller," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(1), pages 1-24.
  16. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Social Choice: A Mean Voter Theorem," Discussion Papers 1989_31, Columbia University, Department of Economics.
  17. Diamond, Peter A, 1981. "Mobility Costs, Frictional Unemployment, and Efficiency," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 798-812, August.
  18. Thomas J. Miceli, 1992. "The Welfare Effects of Non-Price Competition Among Real Estate Brokers," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 519-532.
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Cited by:
  1. İnaltekin, Hazer & Jarrow, Robert A. & Sağlam, Mehmet & Yıldırım, Yıldıray, 2011. "Housing prices and the optimal time-on-the-market decision," Finance Research Letters, Elsevier, vol. 8(4), pages 171-179.
  2. Abdullah Yavas, 2001. "Impossibility of a Competitive Equilibrium in the Real Estate Brokerage Industry," Journal of Real Estate Research, American Real Estate Society, vol. 21(3), pages 187-200.
  3. Anglin, Paul M., 2004. "How long does it take to buy one house and sell another?," Journal of Housing Economics, Elsevier, vol. 13(2), pages 87-100, June.
  4. Oz Shy, 2009. "Real estate brokers and commission: theory and calibrations," Working Papers 09-8, Federal Reserve Bank of Boston.

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