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Real Estate Brokers and Commission: Theory and Calibrations


  • Oz Shy



This paper has two goals: (a) To model an inherent conflict of interest between a seller of a house and the real estate broker hired by the seller. In this environment, the pressure brokers exert on sellers to reduce prices generates faster sales and hence reduces sellers’ expected profit. (b) To calibrate the brokers’ commission rates that would maximize sellers’ expected gain. The calibration results may hint whether the ongoing uniform commission rate reflects collusion among real estate agencies, or should be viewed as competitive. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Oz Shy, 2012. "Real Estate Brokers and Commission: Theory and Calibrations," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 982-1004, November.
  • Handle: RePEc:kap:jrefec:v:45:y:2012:i:4:p:982-1004 DOI: 10.1007/s11146-010-9296-6

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    References listed on IDEAS

    1. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
    2. Carroll, Wayne, 1989. "Fixed-Percentage Commissions and Moral Hazard in Residential Real Estate Brokerage," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 349-365, December.
    3. Thomas S. Zorn & James E. Larsen, 1986. "The Incentive Effects of Flat-Fee and Percentage Commissions for Real Estate Brokers," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(1), pages 24-47.
    4. Paul Anglin & Richard Arnott, 1999. "Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(4), pages 719-749.
    5. Lynn Fisher & Abdullah Yavas, 2010. "A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents," The Journal of Real Estate Finance and Economics, Springer, vol. 40(1), pages 1-13, January.
    6. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    7. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus," American Economic Review, American Economic Association, vol. 99(5), pages 1878-1898, December.
    8. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    9. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-429, July.
    10. Biglaiser, Gary & Friedman, James W., 1994. "Middlemen as guarantors of quality," International Journal of Industrial Organization, Elsevier, vol. 12(4), pages 509-531, December.
    11. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    12. Garella, Paolo G, 1989. "Adverse Selection and the Middleman," Economica, London School of Economics and Political Science, vol. 56(223), pages 395-400, August.
    13. Knoll, Michael S, 1988. "Uncertainty, Efficiency, and the Brokerage Industry," Journal of Law and Economics, University of Chicago Press, vol. 31(1), pages 249-263, April.
    14. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    15. Hackett, Steven C., 1992. "A comparative analysis of merchant and broker intermediation," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 299-315, August.
    16. Michael A. Arnold, 1992. "The Principal-Agent Relationship in Real Estate Brokerage Services," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 89-106.
    17. Hackett, Steven C., 1993. "Consignment contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 20(2), pages 247-253, February.
    18. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
    19. Salant, Stephen W, 1991. "For Sale by Owner: When to Use a Broker and How to Price the House," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 157-173, June.
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    Cited by:

    1. repec:kap:rqfnac:v:49:y:2017:i:1:d:10.1007_s11156-016-0583-z is not listed on IDEAS
    2. Matthew Cypher & S McKay Price & Spenser Robinson & Michael J. Seiler, 2017. "Price Signals and Uncertainty in Commercial Real Estate Transactions," Framed Field Experiments 00626, The Field Experiments Website.

    More about this item


    Real estate brokers; Selling a house; Conflict of interest; Middleman; Commission; Price fixing; Loss aversion; L85;

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services


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