IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11053.html
   My bibliography  Save this paper

Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions

Author

Listed:
  • Steven D. Levitt
  • Chad Syverson

Abstract

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent's informational advantage is larger lead to even greater distortions.

Suggested Citation

  • Steven D. Levitt & Chad Syverson, 2005. "Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions," NBER Working Papers 11053, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11053
    Note: CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11053.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-269, June.
    2. Shaban, Radwan Ali, 1987. "Testing between Competing Models of Sharecropping," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 893-920, October.
    3. Levy, Gilat, 2000. "Strategic consultation in the presence of career concerns," LSE Research Online Documents on Economics 3627, London School of Economics and Political Science, LSE Library.
    4. Munneke, Henry J & Yavas, Abdullah, 2001. "Incentives and Performance in Real Estate Brokerage," The Journal of Real Estate Finance and Economics, Springer, vol. 22(1), pages 5-21, January.
    5. Chang-Tai Hsieh & Enrico Moretti, 2003. "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1076-1122, October.
    6. Hubbard, Thomas N, 2002. "How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 437-468, October.
    7. Vijay Krishna & John Morgan, 2001. "A Model of Expertise," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 747-775.
    8. Timothy E. Jares & James E. Larsen & Thomas S. Zorn, 2000. "An Optimal Incentive System For Real Estate Agents," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 49-59.
    9. 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.
    10. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    11. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 555-578.
    12. Merlo, Antonio & Ortalo-Magne, Francois, 2004. "Bargaining over residential real estate: evidence from England," Journal of Urban Economics, Elsevier, vol. 56(2), pages 192-216, September.
    13. Thomas N. Hubbard, 1998. "An Empirical Examination of Moral Hazard in the Vehicle Inspection Market," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 406-426, Summer.
    14. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    15. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March.
    16. Jonathan Gruber & Maria Owings, 1996. "Physician Financial Incentives and Cesarean Section Delivery," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 99-123, Spring.
    17. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    18. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 253-273, September.
    19. Taylor, Curtis R, 1995. "The Economics of Breakdowns, Checkups, and Cures," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 53-74, February.
    20. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vrinda Kadiyali & Jeffrey Prince & Daniel Simon, 2014. "Is Dual Agency in Real Estate a Cause for Concern?," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 164-195, January.
    2. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 813-886, Elsevier.
    3. Martijn Dröes & Philip Koppels & Boris Ziermans, 2017. "Information Asymmetry, Lease Incentives, and the Role of Advisors in the Market for Commercial Real Estate," ERES eres2017_250, European Real Estate Society (ERES).
    4. Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682, September.
    5. Edward Rosenthal, 2011. "A Pricing Model for Residential Homes with Poisson Arrivals and a Sales Deadline," The Journal of Real Estate Finance and Economics, Springer, vol. 42(2), pages 143-161, February.
    6. Francesca Gino & Lamar Pierce, 2010. "Robin Hood Under the Hood: Wealth-Based Discrimination in Illicit Customer Help," Organization Science, INFORMS, vol. 21(6), pages 1176-1194, December.
    7. Lamar Pierce & Jason Snyder, 2008. "Ethical Spillovers in Firms: Evidence from Vehicle Emissions Testing," Management Science, INFORMS, vol. 54(11), pages 1891-1903, November.
    8. Simon Stevenson & James Young, 2015. "The Role of Undisclosed Reserves in English Open Outcry Auctions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 375-402, June.
    9. Merlo, Antonio & Ortalo-Magne, Francois, 2004. "Bargaining over residential real estate: evidence from England," Journal of Urban Economics, Elsevier, vol. 56(2), pages 192-216, September.
    10. Antonio Merlo & François Ortalo-Magné, 2002. "Bargaining over Residential Real Estate: Evidence from England (Third Version)," PIER Working Paper Archive 04-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 11 Mar 2004.
    11. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," American Economic Review, American Economic Association, vol. 99(5), pages 1878-1898, December.
    12. Li Hao & Wing Suen, 2009. "Viewpoint: Decision‐making in committees," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 42(2), pages 359-392, May.
    13. Lamar Pierce & Michael W. Toffel, 2013. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Organization Science, INFORMS, vol. 24(5), pages 1558-1584, October.
    14. Groll, Thomas & Ellis, Christopher J., 2014. "A simple model of the commercial lobbying industry," European Economic Review, Elsevier, vol. 70(C), pages 299-316.
    15. Bian, Xun & Waller, Bennie D. & Turnbull, Geoffrey K. & Wentland, Scott A., 2015. "How many listings are too many? Agent inventory externalities and the residential housing market," Journal of Housing Economics, Elsevier, vol. 28(C), pages 130-143.
    16. Hazer Inaltekin & Robert Jarrow & Mehmet Saglam & Yildiray Yildirim, 2009. "Housing Market Microstructure," Papers 0907.1853, arXiv.org.
    17. Charles Ka Yui Leung & Youngman Chun Fai Leong & Ida Yin Sze Chan, 2002. "TOM: Why Isn’t Price Enough?," International Real Estate Review, Global Social Science Institute, vol. 5(1), pages 91-115.
    18. Lamar Pierce & Michael W. Toffel, 2010. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Harvard Business School Working Papers 11-004, Harvard Business School, revised Feb 2012.
    19. de Wit, Erik R. & van der Klaauw, Bas, 2013. "Asymmetric information and list-price reductions in the housing market," Regional Science and Urban Economics, Elsevier, vol. 43(3), pages 507-520.
    20. Donner, Herman & Kopsch, Fredrik, 2016. "Housing Tenure and Informational Asymmetries," Working Paper Series 16/3, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11053. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.