A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.9)

Conclusion

This paper re-evaluates the standard solution to a one seller, one agent agency problem in a residential brokerage setting. Under a competitive scenario in which agents may compete to sell an individual listing, it is shown that the percentage commission structure where a portion of the transaction price is allocated to the finding agent could in fact result in an efficient equilibrium. This result follows from the negative externalities of agent intensity levels in a game where there is a “winner take all” allocation rule. It is suggested that given a rule which allocates the full commission to the finding agent, the resulting intensity of agents with a percentage commission is the efficient outcome. However, the paper shows that the observed practice of “uniform commission rate” across properties is not compatible with efficiency. The efficiency requires the commission rate to be a decreasing function of the property price.

Finally, a critical policy implication of the paper is that the efficient outcome can be achieved only if we open the MLS to the public and enable sellers to directly post their property with an MLS without the need to go through a listing agent.

A related policy question is how big an MLS should be. In a more complete model, one would allow for interactions among agents’ effort choices, the size of the MLS and the commission rate and simultaneously solve for optimal levels of all three. Such an extension is out of the scope of the current study and offers an important research question for future research.

Acknowledgement  We thank Leonard Zumpano, two anonymous referees and the participants at the 2003 European Real Estate Society Meeting in Helsinki, Finland and the 2003 AREUEA International Conference in Cracow, Poland, for their comments.


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