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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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    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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