Market Distortions When Agents are Better Informed: The Value of Information in Real Estate Transactions

35 Pages Posted: 10 Feb 2005 Last revised: 15 Sep 2010

See all articles by Steven D. Levitt

Steven D. Levitt

University of Chicago; National Bureau of Economic Research (NBER); American Bar Foundation

Chad Syverson

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: January 2005

Abstract

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent's informational advantage is larger lead to even greater distortions.

Suggested Citation

Levitt, Steven D. and Syverson, Chad, Market Distortions When Agents are Better Informed: The Value of Information in Real Estate Transactions (January 2005). NBER Working Paper No. w11053. Available at SSRN: https://ssrn.com/abstract=649202

Steven D. Levitt (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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American Bar Foundation

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Chad Syverson

University of Chicago Booth School of Business ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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