Market Distortions in Real Estate Transactions

Posted: 25 Jun 2011 Last revised: 13 May 2014

See all articles by Jia Xie

Jia Xie

Indiana University Bloomington

Michael T. Rauh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: September 18, 2011

Abstract

The current commission system in real estate brokerage misaligns agent and house seller interests, so real estate agents have strong incentives to mislead their clients by convincing them to sell their houses too cheaply and too quickly. This paper studies, being motivated by the commission system, which types of agents are misleading which types of clients, so they need to renegotiate a better contract. We find that agents mainly mislead corporate, bank, and government clients, but not individual clients. Moreover, corporate clients are mainly misled by moderately experienced agents, while bank and government clients are mainly misled by less experienced agents. Highly experienced agents, on the other hand, mislead to the least extent on all types of clients. Greater information asymmetry leads to larger distortion on all types of clients, while greater motivation heterogeneity causes larger distortion on corporate and bank clients. We do not find evidence of agent shirking on effort.

Keywords: agency problem, residential real estate, information asymmetry, motivation

JEL Classification: L85, R31, D8

Suggested Citation

Xie, Jia and Rauh, Michael T., Market Distortions in Real Estate Transactions (September 18, 2011). Available at SSRN: https://ssrn.com/abstract=1872525 or http://dx.doi.org/10.2139/ssrn.1872525

Jia Xie (Contact Author)

Indiana University Bloomington ( email )

100 South Indiana Ave.
Bloomington, IN 47405
United States

Michael T. Rauh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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