Fixed-percentage commissions and moral hazard in residential real estate brokerage

Abstract

If home sellers cannot monitor real estate brokers' efforts on their behalf, fixed-percentage brokerage commissions can promote welfare by giving brokers an incentive to tailor their services to their clients' demands. This article shows how a competitive broker optimally allocates selling effort across clients who pay different commissions. There is an equilibrium in which clients who value brokerage services more highly offer to pay larger commissions and consequently receive more selling effort from the broker. If clients who are selling higher-priced houses tend to value brokerage services more highly, then this result helps explain the prevalence of fixed-percentage commissions in the residential real estate brokerage industry and suggests that they could emerge in a competitive setting.

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Carroll, W. Fixed-percentage commissions and moral hazard in residential real estate brokerage. J Real Estate Finan Econ 2, 349–365 (1989). https://doi.org/10.1007/BF00177953

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Key words

  • fixed-percentage commissions
  • broker performance
  • market structure