Paying Extra for a Label? Evidence of Principal-Agent Problem in the Housing Market

Abstract

Intermediaries play an important role in markets with asymmetric information by reducing the search friction and uncertainty for buyers and sellers. However, when a conflict of interest arises, agents may not fully act on behalf of their clients. Using a unique dataset of both housing resale transactions and agent showing records from a major brokerage firm, we document the brokerage agents’ steering behaviors induced by the differential treatment of certain housing units under the taxation scheme in China. Our results show brokerage agents do not always help consumers reduce information asymmetry but strategically promote the units that receive the favorable taxation treatment, because these units offer higher expected commissions. The steering efforts lead to better sales performances of the labeled houses and are highly correlated with the agents’ ability and steering incentives. The buyers thus bear the welfare consequences from potential mismatch and the additional cost in acquiring the labeled units.

Keywords: Steering, Conflict of interest, Market intermediary, Housing market

JEL Classification: D83, D91, R31