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Optimal Contract Design in Residential Brokerage

Author

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  • Peng Liu
  • Jia Xie

Abstract

We introduce a principal–agent model where a real estate agent has private information that is important for a home seller to make decisions on marketing strategies. The seller designs a commission contract that motivates the agent to acquire information and then truthfully reveal it. We find that fixed commission rates are optimal if the agent has no private information or if his private information is given. If the agent's private information is acquired endogenously, the optimal commission rate should vary with the information revealed by the agent. The varying commission rate, however, is associated with distorted decisions on marketing strategies.

Suggested Citation

  • Peng Liu & Jia Xie, 2021. "Optimal Contract Design in Residential Brokerage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(2), pages 493-530, June.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:2:p:493-530
    DOI: 10.1111/1540-6229.12283
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    References listed on IDEAS

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