Buyer Brokerage: Incentive and Efficiency Implications

Posted: 17 Dec 1996

See all articles by Abdullah Yavas

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Peter F. Colwell

University of Illinois

Multiple version iconThere are 2 versions of this paper

Date Written: November 1996

Abstract

This paper examines the incentive and efficiency implications of buyer brokerage. We explore an alternative compensation system for buyer brokerage. Under this system the total commission is independent of the transaction price, and the listing broker receives a percentage of the selling price while the buyer broker receives the remainder of the total commission. We then utilize this compensation system in a search model to show that it is possible to perfectly align the interests of the seller with those of his agent and the interests of the buyer with those of his agent. Furthermore, effort levels can be efficient. This result is a departure from earlier conclusions in the literature that the agent's effort level can neither be perfectly aligned with the principal's interests nor can it be efficient. The departure is primarily due to the feature of our model that it recognizes the costs as well as the benefits of an agent's effort to her principal, and vice versa. Finally, we discuss the implications of buyer brokerage for the future of MLS services.

JEL Classification: D8, L1, R0

Suggested Citation

Yavas, Abdullah and Colwell, Peter F., Buyer Brokerage: Incentive and Efficiency Implications (November 1996). Available at SSRN: https://ssrn.com/abstract=9197

Abdullah Yavas (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Peter F. Colwell

University of Illinois ( email )

304B David Kinley Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-333-1185 (Phone)
217-244-3102 (Fax)

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