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The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston

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  • Panle Jia Barwick
  • Parag A. Pathak

Abstract

This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality. These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures. A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion. House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent. Low cost programs that provide information about past agent performance have the potential to increase overall productivity and generate significant social savings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17227.

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Date of creation: Jul 2011
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Handle: RePEc:nbr:nberwo:17227

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  1. Stephen Ryan, 2006. "The Costs of Environmental Regulation in a Concentrated Industry," 2006 Meeting Papers, Society for Economic Dynamics 9, Society for Economic Dynamics.
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  15. Chang-Tai Hsieh & Enrico Moretti, 2003. "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(5), pages 1076-1122, October.
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Cited by:
  1. 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.
  2. Myrto Kalouptsidi, 2014. "Detection and Impact of Industrial Subsidies: The Case of World Shipbuilding," NBER Working Papers 20119, National Bureau of Economic Research, Inc.

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