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The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston

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  • Panle Jia Barwick
  • Parag A. Pathak

Abstract

This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality. These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures. A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion. House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent. Low cost programs that provide information about past agent performance have the potential to increase overall productivity and generate significant social savings.

Suggested Citation

  • Panle Jia Barwick & Parag A. Pathak, 2011. "The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston," NBER Working Papers 17227, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17227
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    Cited by:

    1. Zhaohui Li & Qiang Li & Hua Sun & Li Sun, 2022. "Diffused effort, asset heterogeneity, and real estate brokerage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 707-742, September.
    2. Jullien, Bruno & Pavan, Alessandro & Rysman, Marc, 2021. "Two-sided Markets, Pricing, and Network Effects," CEPR Discussion Papers 16480, C.E.P.R. Discussion Papers.
    3. Chun-Chang Lee, 2017. "The Impact of Individual Characteristics and Branch Characteristics on Housing Agent Performance: Heckit model and Hierarchical Linear Modeling," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(10), pages 189-199, October.
    4. Victor Aguirregabiria & Mathieu Marcoux, 2021. "Imposing equilibrium restrictions in the estimation of dynamic discrete games," Quantitative Economics, Econometric Society, vol. 12(4), pages 1223-1271, November.
    5. Fahim Ullah & Samad M. E. Sepasgozar, 2020. "Key Factors Influencing Purchase or Rent Decisions in Smart Real Estate Investments: A System Dynamics Approach Using Online Forum Thread Data," Sustainability, MDPI, vol. 12(11), pages 1-36, May.
    6. Mateusz Mysliwski & Fabio M. Sanches & Daniel Silva Junior & Sorawoot Srisuma, 2020. "The Welfare Effects of Promotional Fees," CeMMAP working papers CWP35/20, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    7. Panle Jia Barwick & Parag A. Pathak & Maisy Wong, 2015. "Conflicts of Interest and the Realtor Commission Puzzle," NBER Working Papers 21489, National Bureau of Economic Research, Inc.
    8. Victor Aguirregabiria & Allan Collard-Wexler & Stephen P. Ryan, 2021. "Dynamic Games in Empirical Industrial Organization," NBER Working Papers 29291, National Bureau of Economic Research, Inc.
    9. Vivek Farias & Bar Ifrach & Gabriel Weintraub, 2012. "A Framework for Dynamic Oligopoly in Concentrated Industries," 2012 Meeting Papers 505, Society for Economic Dynamics.
    10. Edward Kung, 2020. "Innovation and Entrepreneurship in Housing," NBER Chapters, in: The Role of Innovation and Entrepreneurship in Economic Growth, pages 499-533, National Bureau of Economic Research, Inc.
    11. Derek Stacey, 2012. "Information, Commitment, and Separation in Illiquid Housing Markets," 2012 Meeting Papers 401, Society for Economic Dynamics.
    12. Sophia Gilbukh & Paul Goldsmith-Pinkham, 2019. "Heterogeneous Real Estate Agents and the Housing Cycle," 2019 Meeting Papers 932, Society for Economic Dynamics.
    13. An-Hsiang Liu & Ralph Siebert, 2020. "The Competitive Effects of Declining Entry Costs over Time: Evidence from the Static Random Access Memory Market," CESifo Working Paper Series 8552, CESifo.
    14. Edward Kung, 2020. "Innovation and Entrepreneurship in Housing," NBER Working Papers 26886, National Bureau of Economic Research, Inc.
    15. Michael W. Walrath, 2016. "Entry Models Applied to Churches: Could Protestants use a Catholic Bishop to Solve Excess Entry?," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 557-588, September.
    16. In Kyung Kim & Yoon-Jin Lee & Young-Ro Yoon, 2017. "Sequential Supply Decision and Market Efficiency: Theory and Evidence," Working Papers 1703, Nazarbayev University, Department of Economics, revised Mar 2017.
    17. Ken Onishi & Naoki Wakamori & Chiyo Hashimoto & Shun-ichiro Bessho, 2016. "Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market," CIRJE F-Series CIRJE-F-1001, CIRJE, Faculty of Economics, University of Tokyo.
    18. Paul Grieco & Hongsong Zhang & Shengyu Li, 2018. "Input Prices, Productivity and Trade Dynamics: Long-run Effects of Liberalization on Chinese Paint Manufactures," 2018 Meeting Papers 874, Society for Economic Dynamics.
    19. Wen-Chung Guo & Fu-Chuan Lai, 2017. "Prices, Locations and Welfare When an Online Retailer Competes with Heterogeneous Brick-and-Mortar Retailers," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 439-468, June.
    20. Li, Shengyu, 2018. "A structural model of productivity, uncertain demand, and export dynamics," Journal of International Economics, Elsevier, vol. 115(C), pages 1-15.
    21. Panle Jia Barwick & Parag A. Pathak & Maisy Wong, 2017. "Conflicts of Interest and Steering in Residential Brokerage," American Economic Journal: Applied Economics, American Economic Association, vol. 9(3), pages 191-222, July.
    22. Seung‐Hyun Hong, 2022. "Real estate agents' influence on housing search," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 563-582, April.
    23. Myrto Kalouptsidi, 2014. "Detection and Impact of Industrial Subsidies: The Case of World Shipbuilding," NBER Working Papers 20119, National Bureau of Economic Research, Inc.
    24. Liu, An-Hsiang & Siebert, Ralph B., 2022. "The competitive effects of declining entry costs over time: Evidence from the static random access memory market," International Journal of Industrial Organization, Elsevier, vol. 80(C).
    25. Lingxiao Li & Abdullah Yavas, 2015. "The Impact of a Multiple Listing Service," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(2), pages 471-506, June.

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    More about this item

    JEL classification:

    • L0 - Industrial Organization - - General
    • L00 - Industrial Organization - - General - - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L8 - Industrial Organization - - Industry Studies: Services
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General

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