A Case for Percentage Commission Contracts: The Impact of a "Race" Among Agents

Posted: 24 Sep 2009

See all articles by Lynn M. Fisher

Lynn M. Fisher

Mortgage Bankers Association

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Date Written: September 23, 2009

Abstract

In standard principal-agent problems, the issue at hand is how to align the interests of the agent with those of her principal. A commonly used contract involves the principal paying the agent a percentage of the sale price as commission. With respect to real estate brokerage conracts, it has been argued that percentage commission contracts fail to provide sufficient incentives to the agent. This paper re-evaluates the standard solution to a one seller, one agent agency problem by introducing more than one agent. It is shown that percentage commission contracts can induce first-best effort levels from agents. The result is due to the negative externalities created by the winner-takes-all race among agents. The optimal commission rates in this model are inconsistent, however, with the observed uniformity in commission rates across markets in the U.S.

Keywords: brokerage, percentage commission contracts

Suggested Citation

Fisher, Lynn M. and Yavas, Abdullah, A Case for Percentage Commission Contracts: The Impact of a "Race" Among Agents (September 23, 2009). Available at SSRN: https://ssrn.com/abstract=1477542

Lynn M. Fisher (Contact Author)

Mortgage Bankers Association ( email )

1919 M Street NW
Washington, DC 20006-3404
United States

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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