Conflicts between Principals and Agents: Evidence from Residential Brokerage

Abstract

In residential real estate an agent is often hired when an owner decides to sell his property. The seller may have less information than his agent and thus may be at a disadvantage in setting the asking price and negotiating the final selling price. The purpose of this study is to offer empirical evidence on whether the percentage commission structure in the real estate brokerage industry creates agency problems. The unique data set allows for the identification of residential properties that were owned by a real estate agent. This enables us to investigate whether the owner-agents are able to use their information advantage to either sell their property more quickly or obtain a higher price for their own properties relative to their clients' properties. The empirical results confirm the predictions of our theoretical model and the presence of agency problems. Using a sample of over 300,000 listings and 193,007 sales, we find that agent-owned houses sell no faster than client-owned houses, but they do sell at a price premium of approximately 4.5 percent.

Keywords: Agency problem, percentage commission contract, residential brokerage

JEL Classification: D8, K12, L14