Residential real estate brokerage as a principal-agent problem

  • Paul M. Anglin
  • Richard Arnott
I. Information and Uncertainty in Brokerage and Appraisal

Abstract

We analyze the terms of the brokerage contract between a house seller and his agent, using the established literature on the principal-agent problem. Considering the influence of moral hazard and adverse selection, we predict a number of features of the contract. Many of these features are not present in observed contracts. To account for this discrepancy, we discuss certain aspects of the real estate market which are not included in the standard principal-agent model but may explain the difference. Standard principal-agent theory neglects important contract design considerations, namely robustness and costs of complexity. In general, the commission contract performs poorly by failing to allocate risk efficiently or to provide agent incentives. It favors established agents and precludes contractual diversity. Finally, we contrast the brokerage contract for real estate with the dealership contract for used cars, but find no compelling answer as to why there are few used house dealers.

Keywords

Principal-agent real estate broker commission moral hazard adverse selection dealer 

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Copyright information

© Kluwer Academic Publishers 1991

Authors and Affiliations

  • Paul M. Anglin
    • 1
  • Richard Arnott
    • 2
  1. 1.University of WindsorWindsorCanada
  2. 2.Boston CollegeChestnut HillUSA

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