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Testing Cost Inefficiency Under Free Entry in the Real Estate Brokerage Industry

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  • Han, Lu
  • Hong, Seung-Hyun

Abstract

This article provides an empirical framework for studying entry and cost inefficiency in the real estate brokerage industry. We present a structural entry model that exploits individual level data on entry and earnings to estimate potential real estate agents' revenues and reservation wages, thereby recovering costs of providing brokerage service. Using U.S. Census data, we estimate the model and find strong evidence for cost inefficiency under free entry, attributable in particular to wasteful nonprice competition. We further use the estimated model to evaluate welfare implications of the rebate bans that currently persist in some U.S. states. Supplemental materials are provided online.
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Suggested Citation

  • Han, Lu & Hong, Seung-Hyun, 2011. "Testing Cost Inefficiency Under Free Entry in the Real Estate Brokerage Industry," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 564-578.
  • Handle: RePEc:bes:jnlbes:v:29:i:4:y:2011:p:564-578
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    File URL: http://pubs.amstat.org/doi/abs/10.1198/jbes.2011.08314
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    Cited by:

    1. Panle Jia Barwick & Parag A. Pathak & Maisy Wong, 2015. "Conflicts of Interest and the Realtor Commission Puzzle," NBER Working Papers 21489, National Bureau of Economic Research, Inc.
    2. Nathan Yang, 2011. "An Empirical Model of Industry Dynamics with Common Uncertainty and Learning from the Actions of Competitors," Working Papers 11-16, NET Institute.
    3. Gautier, Pieter & Siegmann, Arjen & van Vuuren , Aico, 2017. "Real-Estate Agent Commission Structure and Sales Performance," Working Papers in Economics 692, University of Gothenburg, Department of Economics.
    4. Panle Jia & Parag A. Pathak, 2010. "The Impact of Commissions on Home Sales in Greater Boston," American Economic Review, American Economic Association, vol. 100(2), pages 475-479, May.
    5. In Kyung Kim & Yoon-Jin Lee & Young-Ro Yoon, 2017. "Sequential Supply Decision and Market Efficiency: Theory and Evidence," Working Papers 1703, Nazarbayev University, Department of Economics, revised Mar 2017.
    6. Aguirregabiria, Victor, 2009. "Estimation of Dynamic Discrete Games Using the Nested Pseudo Likelihood Algorithm: Code and Application," MPRA Paper 17329, University Library of Munich, Germany.
    7. Gautier, Pieter A. & Siegmann, Arjen & van Vuuren, Aico, 2018. "Real-Estate Agent Commission Structure and Sales Performance," CEPR Discussion Papers 12587, C.E.P.R. Discussion Papers.
    8. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, Elsevier.
    9. Panle Jia Barwick & Parag A. Pathak, 2015. "The costs of free entry: an empirical study of real estate agents in Greater Boston," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 103-145, March.
    10. repec:aea:aejapp:v:9:y:2017:i:3:p:191-222 is not listed on IDEAS

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