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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

type="main"> This article studies the consequences of fixed commissions and low entry barriers in Greater Boston's real estate brokerage industry from 1998–2007. We find that agent entry reduces average service quality and use a dynamic empirical model to study the inefficiency in the current market structure. To accommodate a large state space, we approximate the value function using sieves and impose the Bellman equation as an equilibrium constraint. Our results suggest that a 50% cut in commissions would result in 40% fewer agents, social savings that amount to 23% of industry revenue, and 73% more transactions for the average agent.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:randje:v:46:y:2015:i:1:p:103-145
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    Cited by:

    1. Myrto Kalouptsidi, 2014. "Detection and Impact of Industrial Subsidies: The Case of World Shipbuilding," NBER Working Papers 20119, National Bureau of Economic Research, Inc.
    2. Michael W. Walrath, 2016. "Entry Models Applied to Churches: Could Protestants use a Catholic Bishop to Solve Excess Entry?," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 557-588, September.
    3. Derek Stacey, 2012. "Information, Commitment, and Separation in Illiquid Housing Markets," 2012 Meeting Papers 401, Society for Economic Dynamics.
    4. 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.
    5. Ken Onishi & Naoki Wakamori & Chiyo Hashimoto & Shun-ichiro Bessho, 2016. "Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market," CIRJE F-Series CIRJE-F-1001, CIRJE, Faculty of Economics, University of Tokyo.
    6. Lingxiao Li & Abdullah Yavas, 2015. "The Impact of a Multiple Listing Service," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 471-506, June.
    7. Paul Grieco & Hongsong Zhang & Shengyu Li, 2018. "Input Prices, Productivity and Trade Dynamics: Long-run Effects of Liberalization on Chinese Paint Manufactures," 2018 Meeting Papers 874, Society for Economic Dynamics.
    8. Vivek Farias & Bar Ifrach & Gabriel Weintraub, 2012. "A Framework for Dynamic Oligopoly in Concentrated Industries," 2012 Meeting Papers 505, Society for Economic Dynamics.
    9. repec:bla:jindec:v:65:y:2017:i:2:p:439-468 is not listed on IDEAS
    10. repec:eee:inecon:v:115:y:2018:i:c:p:1-15 is not listed on IDEAS
    11. repec:aea:aejapp:v:9:y:2017:i:3:p:191-222 is not listed on IDEAS

    More about this item

    JEL classification:

    • L0 - Industrial Organization - - General
    • L00 - Industrial Organization - - General - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L8 - Industrial Organization - - Industry Studies: Services
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General

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