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

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Listed author(s):
  • 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.

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File URL: http://www.nber.org/papers/w11053.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11053.

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Date of creation: Jan 2005
Publication status: published as 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, 08.
Handle: RePEc:nbr:nberwo:11053
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Find related papers by 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

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