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

Footnotes 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 ...
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A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.10)

References Anglin, P. M. (1994). Contracts for the sale of residential real estate. Journal of Real Estate Finance and Economics, 8, 195–211. doi:10.1007/BF01096991. 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. doi:10.1007/BF00173119. Anglin, P. M., & Arnott, R. (1999). Are broker’s commission rates on home sales too high? A conceptual analysis. Real Estate Economics, 27, 719–747. doi:10.1111/1540-6229.00790. Levitt, S., & Syverson, C. (2005). Market...
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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...
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A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.8)

Cooperating Agents and Search for New Listings In the analysis above we assumed that the seller has the ability to list his property with an MLS. Thus, the model involves no listing agents and the commission split between the listing agent and the selling agent. Miceli (1991) evaluates the effect of different commission splits between agents who cooperate in MLS sales. Assuming that a percentage commission structure exists between the seller and the listing agent, Miceli shows that the commission split which maximizes the seller’s utility under the...
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A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.7)

Efficient Search We first consider the equilibrium under full information where the seller can observe the agents’ intensity levels. Under full information, the seller would choose the optimal intensity level, λ**, that maximizes his expected payoff in Eq. 10 subject to U = φ. Given that we have assumed n identical agents, we will focus on symmetric Nash equilibria where each agent chooses the same intensity level, λ j = λ. Thus, the seller’s choice of λ** can be written as: (13) The total value of the agency contract is given by the...
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A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.6)

Agent Competition Now we consider the implications of multiple agents who compete to procure a buyer for the seller’s property. Suppose there are n agents, and the first agent to procure a buyer is awarded the full commission, αP. Agents are identical in that each agent has an identical cost of effort intensity function, c(λ), and reservation payoff, φ. We assume that each agent participates in the sale of every listing on the market. To highlight our objective in the simplest manner possible, we focus on a representative listing and study the competition among...
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A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents (P.5)

The Model It is important to note that objective of residential home sellers is likely a combination of minimizing time to sale and maximizing sale price. Various models in the literature address one or both of these objectives. For the purposes of this paper, we will take the expected sale price of the property as given and focus on the time to sale as the criteria for maximizing seller utility.4 This simplifies the problem and allows us to focus on the optimality of the commission structure. It is also in line with the argument that...
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