The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston

57 Pages Posted: 10 Jul 2019

See all articles by Panle Jia Barwick

Panle Jia Barwick

Cornell University - Department of Economics

Parag A. Pathak

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: January 2014

Abstract

This paper studies the consequences of fixed commissions and low entry barriers in Greater Boston's real estate brokerage industry from 1998-2007, a period with substantial agent turnover. We find that entry is not associated with increased sales probabilities or reduced sales time. Instead, it decreases the market share of experienced agents and reduces average service quality. We develop a dynamic empirical model motivated by these patterns to study the extent of inefficiency in the current market structure compared to alternatives. To accommodate a large state space, we approximate the value function using sieves and impose the Bellman equation as an equilibrium constraint. If commissions are cut in half, there would be 40% fewer agents implying social savings of 23% of industry revenue, and the average agent would facilitate 73% more transactions. House price appreciation of 50% during our sample period accounts for a 24% increase in the number of agents and a 31% decline in average agent productivity. Finally, improving information about past agent performance can increase productivity and generate significant social savings.

Suggested Citation

Barwick, Panle Jia and Pathak, Parag A., The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston (January 2014). RAND Journal of Economics, Vol. 46, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=3417205 or http://dx.doi.org/10.2139/ssrn.3417205

Panle Jia Barwick (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Parag A. Pathak

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

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