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How not to Reduce Commission Rates of Real Estate Agents: Evidence From Germany

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  • Julius Stoll

Abstract

This paper studies a recent legal reform in Germany, which aims to lower commission rates of real estate agents by raising the cost salience of sellers. I find that the reform has backfired and real estate agents have exploited the transition to increase their commission rates. The findings document that in some regions real estate agents increase their commission by up to 2 percentage points, adding over € 6,000 in transaction cost to the average home sale. As explicit collusion is unlikely in this setting, I argue that this arbitrary increase points to seller ignorance instead. To verify if and why sellers fail to induce price competition, I run a pre-registered survey experiment with 1,062 real estate agents. Although commission rates should be negotiated independently for each sale, the survey confirms that 85% of sellers do not attempt to negotiate lower commission rates. The randomized experimental questions suggest that real estate agents may cater to the low willingness of sellers to negotiate by providing misleading reference commission rates and shrouding the economic incidence for sellers.

Suggested Citation

  • Julius Stoll, 2023. "How not to Reduce Commission Rates of Real Estate Agents: Evidence From Germany," Berlin School of Economics Discussion Papers 0026, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0026
    DOI: 10.48462/opus4-5077
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    References listed on IDEAS

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    1. Han, Lu & Hong, Seung-Hyun, 2011. "Testing Cost Inefficiency Under Free Entry in the Real Estate Brokerage Industry," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 564-578.
    2. Sumit Agarwal & Artashes Karapetyan, 2022. "Information Salience and Mispricing in Housing," Management Science, INFORMS, vol. 68(12), pages 9082-9106, December.
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