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Is the Compensation Model for Real Estate Brokers Obsolete?

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Author Info

  • Thomas Miceli

    ()

  • Katherine Pancak

    ()

  • C. Sirmans

    ()

Abstract

This study examines the traditional compensation model for real estate brokers under which both the listing and buyer brokers are paid by the seller based on a percentage of the property sales price. We argue that this model has not evolved to reflect contemporary legal agency relationships and technology-driven information availability. It therefore creates substantial transactional inefficiencies for buyers and sellers at both the matching and bargaining stages of a transaction. While there is evidence that market forces are pushing for a change in the status quo, there is also evidence that the brokerage industry is resisting this change by pursuing anti-competitive policies and laws. We explore the economics of the current and alternative compensation structures and suggest policy implications regarding anti-competitive behavior in the brokerage industry. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11146-007-9026-x
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 35 (2007)
Issue (Month): 1 (July)
Pages: 7-22

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Handle: RePEc:kap:jrefec:v:35:y:2007:i:1:p:7-22

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: Agency; Brokerage; Multiple listings; Percentage commission;

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References

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  1. 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, vol. 20(1), pages 31-47.
  2. 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.
  3. Abdullah Yavas & Thomas J. Miceli & C.F. Sirmans, 2001. "An Experimental Analysis of the Impact of Intermediaries on the Outcome of Bargaining Games," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(2), pages 251-276.
  4. Levmore, Saul, 1993. "Commissions and Conflicts in Agency Arrangements: Lawyers, Real Estate Brokers, Underwriters, and Other Agents' Rewards," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 503-39, April.
  5. Williams, Joseph T, 1998. "Agency and Brokerage of Real Assets in Competitive Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 239-80.
  6. Yinger, John, 1981. "A Search Model of Real Estate Broker Behavior," American Economic Review, American Economic Association, vol. 71(4), pages 591-605, September.
  7. Lueck, Dean, 1994. "Common property as an egalitarian share contract," Journal of Economic Behavior & Organization, Elsevier, vol. 25(1), pages 93-108, September.
  8. 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.
  9. Rutherford, R.C. & Springer, T.M. & Yavas, A., 2005. "Conflicts between principals and agents: evidence from residential brokerage," Journal of Financial Economics, Elsevier, vol. 76(3), pages 627-665, June.
  10. Bartlett, Randall, 1981. "Property Rights and the Pricing of Real Estate Brokerage," Journal of Industrial Economics, Wiley Blackwell, vol. 30(1), pages 79-94, September.
  11. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
  12. Gurman, Jesse & Hahn, Robert W. & Litan, Robert E., 2005. "Bringing More Competition to Real Estate Brokerage," Working paper 532, Regulation2point0.
  13. John H. Crockett, 1982. "Competition and Efficiency in Transacting: The Case of Residential Real Estate Brokerage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(2), pages 209-227.
  14. Thomas S. Zorn & James E. Larsen, 1986. "The Incentive Effects of Flat-Fee and Percentage Commissions for Real Estate Brokers," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(1), pages 24-47.
  15. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  16. Anglin, Paul M, 1994. "Contracts for the Sale of Residential Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 8(3), pages 195-211, May.
  17. Abdullah Yavas, 1996. "Matching of Buyers and Sellers by Brokers: A Comparison of Alternative Commission Structures," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(1), pages 97-112.
  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.
  19. 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.
  20. Thomas J. Miceli, 1991. "The Multiple Listing Service, Commission Splits, and Broker Effort," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(4), pages 548-566.
  21. Sirmans, C. F. & Turnbull, Geoffrey K., 1997. "Brokerage Pricing under Competition," Journal of Urban Economics, Elsevier, vol. 41(1), pages 102-117, January.
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Citations

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Cited by:
  1. Anupam Nanda & Katherine A. Pancak, 2009. "Broker Duty to Clients: Why States Mandate Minimum Service Requirements," Alumni working papers 2009-01, University of Connecticut, Department of Economics.
  2. Stone, Michael P. & Miceli, Thomas J., 2012. "Optimal attorney advertising," International Review of Law and Economics, Elsevier, vol. 32(3), pages 329-338.
  3. Jonathan Wiley & Justin Benefield & Marcus Allen, 2014. "Cyclical Determinants of Brokerage Commission Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 196-219, January.
  4. Sahin, M. Abdullah & Sirmans, C.F. & Yavas, Abdullah, 2013. "Buyer brokerage: Experimental evidence," Journal of Housing Economics, Elsevier, vol. 22(4), pages 265-277.

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