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The Journal of Real Estate Finance and Economics

Erschienen in:

01.11.2008

The Effect of Reputation and Competition on the Advice of Real Estate Agents

verfasst von: Hilde E. Patron, Kenneth D. Roskelley

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 4/2008

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Abstract

We study a two-period bargaining game where buyers and sellers employ real estate agents to help them determine the sales price of a house. We find that agents are less likely to provide aggressive bargaining advice to their client when they receive percentage commissions and when they work for the buyer. In addition, we find that agents are less likely to suggest aggressive bargaining strategies when there is little market competition, the gains to trade are large, in markets where housing values appreciate slowly, and when dual agency is permitted. More importantly, we show that an agent is more likely to bargain aggressively and capture a portion of the gains to trade for a client when the house’s sales price is closely related to the agent’s reputation and future business (referrals).

Vorheriger Artikel Asset Price Spillover, Collateral and Crises: with an Application to Property Market Policy

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For surveys of real estate brokerage research see Benjamin et al. (2000) and Zumpano and Hooks (1988).

Miceli (1991) also shows however, that if sellers were to pay the full commission to the selling agent, brokers might boycott such listings.

According to the National Association of Realtors (2004), 44% of people who bought a house and 38% of people who sold a house between August 2003 and July 2004 found their agents through a friend or relative. Of the sellers, 54% stated that reputation was the most important characteristic they looked for in their agent.

One possible criticism of our model is that it forces the agents to agree to a sale since failure to do so results in no sale (or commission) for the period. Extending our model, however, to allow principals to change agents while also providing them with another potential match within a period does not change our qualitative results. In addition, allowing the buyer’s agent to re-bid on the house after having their first bid rejected does not change the equilibrium implications about how aggressively agents bargain on behalf of their clients. For brevity and ease of exposition, we omit these generalizations from the model.

For rational principals to employ agents, their reservation prices \( \underline{V} _{t} \) and \( \overline{V} _{t} \) should be shifted to ensure that the commission paid to the agent is, on average, recovered by the principal through captured surplus. That is, the acceptable price range for principals that employ agents should be \( {\left[ {\underline{V} _{t} {\left( {1 + a} \right)},\overline{V} _{t} {\left( {1 - a} \right)}} \right]} \). For ease of exposition, we have omitted this from the discussion.

The agents’ role in this bargaining game is to help their principal capture as much of the surplus, or gains to trade, as possible. As such, we can make inference about when an agent is more likely to capture surplus for her client. We can also study under what circumstances real estate agents are likely to suggest a bargaining strategy that is compatible with their ex ante (expected) beliefs. We can not, however, say that the principal is materially harmed or misled just because his agent is unlikely to capture the surplus.

An argument could be made that if this is the equilibrium, then the house has not sold above its expected price. Bear in mind, however, that the first period equilibrium will depend on the relationship between all the relevant (and unknown) parameters. Furthermore, these parameters will vary across agents, clients, and markets. That is, this is a partial equilibrium model. We do not intend to solve a general equilibrium for the aggregate market.

Since the period two payoffs are symmetric, we only present one payoff per cell.

The common practice of the seller paying a commission to the buyer’s agent will often make the buyer’s agent a subagent of the seller. This exacerbates the agent’s conflict by creating a fiduciary duty between the seller and the buyer’s agent, requiring the agent to pass along any relevant information the buyer may have disclosed. This legal relationship is often unknown to buyers (and even agents). A cynical interpretation is that the seller has traditionally paid the buyer’s agent a commission to help create this conflict of interest. See Olazábal (2003) for a detailed discussion of the legal issues.

Anglin, P. M., & Arnott, R. (1991). Residential real estate brokerage as a principal–agent problem. Journal of Real Estate Finance and Economics, 4, 99–125.CrossRef

Benjamin, J. D., Jud, G. D., & Sirman, G. S. (2000). What do we know about real estate brokerage? Journal of Real Estate Research, (20), 5–30.

Crawford, V. P., & Sobel, J. (1982). Strategic information transmission. Econometrica, 50, 1431–1451.CrossRef

Geltner, D., Kluger, B., & Miller, N. G. (1991). Optimal price and selling effort from perspectives of the broker and seller. AREUEA Journal, 19, 1–24.

Holt, C. (1995). Industrial organization: A survey of experimental research. In J. Kagel, & A. Roth (Eds.), Handbook of Experimental Economics (pp. 339–443). Princeton, NJ: Princeton University Press.

Levitt, S. D., & Syverson, C. (2002). Market distortions when agents are better informed: The value of information in real estate. NBER Working Paper 11053.

Miceli, T. J. (1989). The optimal duration of real estate listing contracts. AREUEA Journal, 17, 267–277.

Miceli, T. J. (1991). The multiple listing service, commission splits and broker effort. AREUEA Journal, 19, 548–566.

National Association of Realtors (2004). The 2004 National Association of Realtors® Profile of House Buyers and Sellers.

Olazábal, A. M. (2003). Redefining realtor relationships and responsibilities: The failure of state regulatory responses. Harvard Journal on Legislation, 40, 65–132.

Rasmusen, E. (1997). Games and information (2nd ed.). Massachusetts: Blackwell Publishers.

Roth, A. E. (1995). Bargaining experiments. In J. Kagel, &A. Roth (Eds.), Handbook of Experimental Economics (pp. 171–202). Princeton, NJ: Princeton University Press.

Yavas, A. (1996). Matching of buyers and sellers by brokers: A comparison of alternative commission structures. Real Estate Economics, 24, 97–112.CrossRef

Zorn, T. S., & Larsen, J. E. (1986). The incentive effects of flat-fee abd percentage commissions for real estate brokers. AREUEA Journal, 14, 34–47.

Zumpano, L. V., & Hooks, D. L. (1988). The real estate brokerage market: A critical re-evaluation. AREUEA Journal, 16, 1–16.

Titel: The Effect of Reputation and Competition on the Advice of Real Estate Agents
verfasst von: Hilde E. Patron
Kenneth D. Roskelley
Publikationsdatum: 01.11.2008
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 4/2008
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-007-9082-2

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