Real Estate Brokers and Commission: Theory and Calibrations

22 Pages Posted: 18 Sep 2009

See all articles by Oz Shy

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2009

Abstract

The author constructs a theoretical model to examine the effects of an inherent conflict of interest between a seller of a house and the real estate broker hired by the seller. The model is then used to calibrate the broker's commission rates that would maximize the seller's expected gain. The findings suggest that while the pressure brokers exert on sellers to reduce prices generates faster sales and hence improves social welfare, the usual commission rate of 6 percent exceeds the seller's value-maximizing rate if the sale is handled by a single agent. On the other hand, if several agents (such as the buyer's and seller's brokers and the agencies that employ these realtors) split the commission, then a 6 percent commission rate may be required to motivate the broker to sell at a high price.

Keywords: real estate brokers, selling a house, conflict of interest, middleman, commission, price fixing

JEL Classification: L85

Suggested Citation

Shy, Oz, Real Estate Brokers and Commission: Theory and Calibrations (September 3, 2009). FRB of Boston Working Paper No. 09-8, Available at SSRN: https://ssrn.com/abstract=1475315 or http://dx.doi.org/10.2139/ssrn.1475315

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
81
Abstract Views
763
rank
329,935
PlumX Metrics