Testing Cost Inefficiency under Free Entry in the Real Estate Brokerage Industry
University of Toronto - Rotman School of Management
University of Illinois at Urbana, Champaign - Department of Economics
May 10, 2010
This article provides an empirical framework to study entry and cost inefficiency in the real estate brokerage industry. We develop a structural entry model that exploits individual level data on entry and earnings to estimate potential real estate agents' revenues and reservation wages, thereby recovering costs of providing brokerage service. We estimate the model, using the Census data. Based on our cost estimates, we find strong evidence for cost inefficiency under free entry, particularly attributable to wasteful non-price competition. We further use the estimated model to evaluate welfare implications of the rebate bans that currently persist in some U.S. states. We find that removing rebate bans would decrease the equilibrium number of real estate agents by 5.14% and reduce total brokerage costs by 8.87%.
Number of Pages in PDF File: 55
Keywords: real estate brokerage, entry, cost inefficiency, structural estimation
JEL Classification: C35, C51, L85, R31
Date posted: August 6, 2008 ; Last revised: May 11, 2010
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