Buyer Brokerage: Incentive and Efficiency Implications
Posted: 17 Dec 1996
Date Written: November 1996
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: Suggested Citation