Real Estate Brokers and Commission: Theory and Calibrations
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This paper has two goals: (a) To model an inherent conflict of interest between a seller of a house and the real estate broker hired by the seller. In this environment, the pressure brokers exert on sellers to reduce prices generates faster sales and hence reduces sellers’ expected profit. (b) To calibrate the brokers’ commission rates that would maximize sellers’ expected gain. The calibration results may hint whether the ongoing uniform commission rate reflects collusion among real estate agencies, or should be viewed as competitive.
KeywordsReal estate brokers Selling a house Conflict of interest Middleman Commission Price fixing Loss aversion
I thank an anonymous referee, Mary Burke and Suzanne Lorant for most valuable comments and suggestions on an earlier draft. The views and opinions expressed in this paper are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.
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