A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.11)


1 This is similar to the result obtained in the R&D literature where each firm expends too many resources on developing a new patented product (see Mortensen 1982).
2 The assumption here is that the seller delegates the choice of the reservation price to his broker.
3 As is well known, the competition among agents for new listings is a socially wasteful activity under the MLS system and it is one of the sources of inefficiencies in Williams’ model. Recently, sellers in different regions of the USA have begun listing properties on the MLS through agents for a fixed fee. The resulting listing contract typically promises a percentage commission to any agent who brings a ready, willing and able buyer.
4 An alternative is to argue that the agent’s effort impacts the selling price rather than the selling time (e.g., Anglin 1994). We believe that the agent’s effort impacts the time on the market more so than it affects the selling price.
5 This is common in the R&D studies of continuous time models (e.g., Mortensen 1982).
6 An alternative would be to have the commission rate determined as part of the contract between the seller and the agent. Determining the optimal contract between the seller and the agent is out of the scope of this paper. Our objective is to study if, for a given commission rate, the percentage commission structure could lead to efficient effort intensities by agents.
7 This constraint implicitly indicates that brokers earn zero economic profits.
8 A net listing contract specifies a predetermined amount, P, that the agent has to pay to the seller upon the sale of the property. The agent’s commission will be the difference between the actual sale price and P.
9 Clearly, with multiple properties there could exist interactions in effort levels of an agent across properties. This is likely to impact the quantitative results of the paper. However, it will not change the main result of the paper that competition among agents creates negative externalities, and this could offset the positive externalities created by the percentage commission structure.
10 A general functional form for X of X = f(λ 1.. λ n ) will imply the same results as long as the partial derivative $$f_{\lambda i} > 0$$ for all i. The reason for assuming the simple functional form for X in the model is that a general functional form could lead to multiple equilibria. Existence of multiple equilibria raises a number of new and complicated questions (e.g., which equilibrium would emerge, which equilibrium is more efficient, etc.). A detailed discussion of the role of brokers in search markets with multiple equilibria can be found in Yavas (1995b).
11 Note that Eq. 16 is independent of a and$$U\left( {a,l_{_1 }^ * , \ldots l_2^ * } \right)$$ is an increasing function of a.
12 The website http://www.bostonfsbo.net/, for instance, enables sellers list their homes in the MLS for less than $500.

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