The Role of Transaction Costs in Impeding Market Exchange in Real Estate

Abstract

We examine the role transaction costs play, particularly the costs related to search and bargaining, in impeding or delaying real estate market transactions. In a theoretical model, we show that agents’ incentives are influenced by transaction costs in a way that will increase a home’s marketing duration and decrease the probability a home will sell. Exploiting a decade of transactions from Virginia, we use a variety of empirical modeling techniques to estimate the effect of transaction costs on a property’s time on market (TOM) and its probability of sale. We find that factors associated with high search and bargaining costs increase a home’s TOM and reduce the probability that it will sell.

Keywords: transaction cost, real estate, agent incentives

JEL Classification: K00, R30, R20