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Real Estate Brokerage: The Impact of a ëraceí on incentive compatible commission contracts

Author

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  • Lynn Fisher
  • Yavas Abdullah

Abstract

"Standard principal-agent theory with one broker and one seller suggests that percentage commission structure fails to offer adequate incentives to evoke optimal effort on the part of the broker. This is due to the fact that a percentage contract only offers the broker a portion of any benefits accruing to the seller. The implication of such analysis being that the percentage commission contract is inefficient. This paper offers a theoretical model to investigate the efficiency of a percentage commission structure in a Multiple Listing Service (MLS) environment by using a model with multiple brokers. It proves that a percentage commission contract with multiple brokers can induce a total level of broker effort that is optimal for the seller. The results proceed from the insights of literature on Research & Development in which agents exert too much effort in an innovation race where only the successful party receives compensation. The negative externalities created by the ""race"" among brokers can be enough to offset the positive externalities created by the percentage commission structure, hence resulting in optimal broker effort level."

Suggested Citation

  • Lynn Fisher & Yavas Abdullah, 2003. "Real Estate Brokerage: The Impact of a ëraceí on incentive compatible commission contracts," ERES eres2003_155, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2003_155
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    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2003-155
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    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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