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Real Estate Brokers and Commission: Theory and Calibrations

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  • Oz Shy

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Abstract

This paper has two goals: (a) To model an inherent conflict of interest between a seller of a house and the real estate broker hired by the seller. In this environment, the pressure brokers exert on sellers to reduce prices generates faster sales and hence reduces sellers’ expected profit. (b) To calibrate the brokers’ commission rates that would maximize sellers’ expected gain. The calibration results may hint whether the ongoing uniform commission rate reflects collusion among real estate agencies, or should be viewed as competitive. Copyright Springer Science+Business Media, LLC 2012

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File URL: http://hdl.handle.net/10.1007/s11146-010-9296-6
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Bibliographic Info

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

Volume (Year): 45 (2012)
Issue (Month): 4 (November)
Pages: 982-1004

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Handle: RePEc:kap:jrefec:v:45:y:2012:i:4:p:982-1004

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

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Keywords: Real estate brokers; Selling a house; Conflict of interest; Middleman; Commission; Price fixing; Loss aversion; L85;

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  1. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
  2. Carroll, Wayne, 1989. "Fixed-Percentage Commissions and Moral Hazard in Residential Real Estate Brokerage," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 349-65, December.
  3. 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.
  4. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  5. Salant, Stephen W, 1991. "For Sale by Owner: When to Use a Broker and How to Price the House," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 157-73, June.
  6. 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.
  7. Hackett, Steven C., 1993. "Consignment contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 20(2), pages 247-253, February.
  8. Garella, Paolo G, 1989. "Adverse Selection and the Middleman," Economica, London School of Economics and Political Science, vol. 56(223), pages 395-400, August.
  9. Francois Ortalo-Magne & Aviv Nevo & Igal Hendel, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," 2007 Meeting Papers 89, Society for Economic Dynamics.
  10. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  11. Hackett, Steven C., 1992. "A comparative analysis of merchant and broker intermediation," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 299-315, August.
  12. Michael A. Arnold, 1992. "The Principal-Agent Relationship in Real Estate Brokerage Services," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 89-106.
  13. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
  14. Lynn Fisher & Abdullah Yavas, 2010. "A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents," The Journal of Real Estate Finance and Economics, Springer, vol. 40(1), pages 1-13, January.
  15. David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
  16. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  17. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
  18. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
  19. Knoll, Michael S, 1988. "Uncertainty, Efficiency, and the Brokerage Industry," Journal of Law and Economics, University of Chicago Press, vol. 31(1), pages 249-63, April.
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