The Journal of Real Estate Finance and Economics

, Volume 45, Issue 4, pp 982–1004 | Cite as

Real Estate Brokers and Commission: Theory and Calibrations

Article

Abstract

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.

Keywords

Real estate brokers Selling a house Conflict of interest Middleman Commission Price fixing Loss aversion 

JEL Classification

L85 

Notes

Acknowledgements

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.

References

  1. Anglin, P., & Arnott, R. (1999). Are brokers’ commission rates on home sales too high? A conceptual analysis. Real Estate Economics, 27(4), 719–749.CrossRefGoogle Scholar
  2. Arnold, M. (1992). The principal-agent relationship in real estate brokerage services. Real Estate Economics, 20(1), 89–106.CrossRefGoogle Scholar
  3. Biglaiser, G. (1993). Middlemen as experts. RAND Journal of Economics, 24(2), 212–223.CrossRefGoogle Scholar
  4. Biglaiser, G., & Friedman, J. (1994). Middlemen as guarantors of quality. International Journal of Industrial Organization, 12(4), 509–531.CrossRefGoogle Scholar
  5. Carroll, W. (1989). Fixed-percentage commissions and moral hazard in residential real estate brokerage. The Journal of Real Estate Finance and Economics, 2,(4), 349–365.CrossRefGoogle Scholar
  6. Commission, Federal Trade & U.S. Department of Justice (2007). Competition in the Real Estate Brokerage Industry.Google Scholar
  7. Crawford, V., & Sobel, J. (1982). Strategic information transmission. Econometrica, 50(6), 1431–1451.CrossRefGoogle Scholar
  8. Fisher, L., & Yavas, A. (2010). A case for percentage commission contracts: The impact of a “Race” among agents. The Journal of Real Estate Finance and Economics, 40(1), 1–13.CrossRefGoogle Scholar
  9. Garella, P. (1989). Adverse selection and the middleman. Economica, 56(223), 395–400.CrossRefGoogle Scholar
  10. Genesove, D., & Mayer, C. (2001). Loss aversion and seller behavior: Evidence from the housing market. Quarterly Journal of Economics, 116(4), 1233–1260.CrossRefGoogle Scholar
  11. Hackett, S. (1992). A comparative analysis of merchant and broker intermediation. Journal of Economic Behavior & Organization, 18(3), 299–315.CrossRefGoogle Scholar
  12. Hackett, S. (1993). Consignment contracting. Journal of Economic Behavior & Organization, 20(2), 247–253.CrossRefGoogle Scholar
  13. Hendel, I., Nevo, A., & Ortalo-Magne, F. (2009). The relative performance of real estate marketing platforms: Mls versus fsbomadison.com. The American Economic Review, 99(5), 1878–1898.Google Scholar
  14. Knoll, M. (1988). Uncertainty, efficiency, and the brokerage industry. Journal of Law and Economics, 31(1), 249–263.CrossRefGoogle Scholar
  15. Levitt, S., & Syverson, C. (2008). Market distortions when agents are better informed: The value of information in real estate transactions. The Review of Economics and Statistics, 90(4), 599–611.CrossRefGoogle Scholar
  16. Merlo, A., Ortalo-Magné, F., & Rust, J. (2008). The home selling problem: Theory and evidence. Tech. rep., University of Maryland Working Paper.Google Scholar
  17. Riley, J. (2001). Silver signals: Twenty-five years of screening and signaling. Journal of Economic Literature, 39(2), 432–478.CrossRefGoogle Scholar
  18. Rubinstein, A., & Wolinsky, A. (1987). Middlemen. The Quarterly Journal of Economics, 102(3), 581–593.CrossRefGoogle Scholar
  19. Salant, S. (1991). For sale by owner: When to use a broker and how to price the house. The Journal of Real Estate Finance and Economics, 4(2), 157–173.CrossRefGoogle Scholar
  20. Schroeter, J. (2003). Competition and value-of-service pricing in the residential real estate brokerage market. Iowa State University, Department of Economics, Staff General Research Paper.Google Scholar
  21. Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 106(4), 1039–1061.CrossRefGoogle Scholar
  22. Yavas, A. (1994). Middlemen in bilateral search markets. Journal of Labor Economics, 12(3), 406–429.CrossRefGoogle Scholar
  23. Zorn, T., & Larsen, J. (1986). The incentive effects of flat-fee and percentage commissions for real estate brokers. Real Estate Economics, 14(1), 24–47.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Research DepartmentFederal Reserve Bank of BostonBostonUSA

Personalised recommendations