Abstract

http://ssrn.com/abstract=441980
 
 

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Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry


Chang-Tai Hsieh


University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Enrico Moretti


University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)


Journal of Political Economy, Vol. 111, October 2003

Abstract:     
Real estate agents typically charge a 6 percent commission, regardless of the price of the house sold. As a consequence, the commission fee from selling a house will differ dramatically across cities depending on the average price of housing, although the effort necessary to match buyers and sellers may not be that different. We use a simple economic model to show that if barriers to entry are low, the entry of real estate agents in cities with high housing prices is socially inefficient. Consistent with our model, we find that when the average price of land in a city increases, (1) the fraction of real estate brokers in a city increases, (2) the productivity of an average real estate agent (houses sold per hour worked) falls, and (3) the real wage of a typical real estate agent remains unchanged. We cannot completely rule out the alternative explanation that these results reflect unmeasured differences in the quality of broker services. However, we present evidence that as the average price of housing in a city increases, there is only a small increase in the amount of time a buyer spends searching for a house, and the average time a house for sale stays on the market falls.

Accepted Paper Series


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Date posted: October 6, 2003  

Suggested Citation

Hsieh, Chang-Tai and Moretti, Enrico, Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry. Journal of Political Economy, Vol. 111, October 2003. Available at SSRN: http://ssrn.com/abstract=441980

Contact Information

Chang-Tai Hsieh (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Enrico Moretti
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
HOME PAGE: http://emlab.berkeley.edu/~moretti/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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