Building Social Capital at the Expense of Principals: Evidence from Residential Real Estate Agent Trading Networks

Abstract

Principal-agent problems are common in industries, such as real estate, that employ agents. Social capital theory explains how an agent’s incentive to maximize revenue working with other agents on multiple transactions may be a disincentive when negotiating to capture a price surplus in individual transactions. We find that when two agents who have worked together represent clients in a single-family house transaction, the property sells for a lower price. This suggests that agents maximize their income over time by building a network of cooperating agents. The effect persists throughout the market cycle.

Keywords: agency issues, social networks, social capital

JEL Classification: R00