Testing Cost Inefficiency under Free Entry in the Real Estate Brokerage Industry

55 Pages Posted: 6 Aug 2008 Last revised: 11 May 2010

Lu Han

University of Toronto - Rotman School of Management

Seung-Hyun Hong

University of Illinois at Urbana, Champaign - Department of Economics

Date Written: May 10, 2010

Abstract

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%.

Keywords: real estate brokerage, entry, cost inefficiency, structural estimation

JEL Classification: C35, C51, L85, R31

Suggested Citation

Han, Lu and Hong, Seung-Hyun, Testing Cost Inefficiency under Free Entry in the Real Estate Brokerage Industry (May 10, 2010). Available at SSRN: https://ssrn.com/abstract=1205678 or http://dx.doi.org/10.2139/ssrn.1205678

Lu Han

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Seung Hyun Hong (Contact Author)

University of Illinois at Urbana, Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

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