Each real estate transaction involves a number of strategic decisions. First, the seller needs to determine an optimal asking price under incomplete information without the knowledge of the preferences and valuations of potential buyers. Then, sellers and buyers have to decide on an optimal search strategy, an optimal reservation price and an associated stopping rule. However, a contact between the buyer and seller does not necessarily result in a mutually acceptable match, depending on the reservation prices and outside options of the two sides. Once a contact is achieved, the two sides engage in a bargaining game, again under incomplete information without the knowledge of each other’s reservation prices. If the bargaining results in an agreement, then a sale contract is signed. To finance the purchase, the buyer often chooses among a rich menu of mortgage contracts, where the choices offered by the lender often aims at screening borrowers of different risk types. Along the way, the buyer and seller deal with agents and intermediaries, including lawyers, lending agencies and real estate brokers, and they need to worry about the effectiveness of the compensation structure to minimize potential agency problems.

The complex real estate transaction makes a fascinating research lab to analyze many interesting economic problems and to apply various economic models; from price theory to contract theory, from matching games to bargaining games, from market structure to the theory of the firm, from moral hazard to adverse selection problems, from agency theory to search theory, etc.

Brokers play a bigger role during a real estate transaction than any other third party. They are involved in almost every phase of a real estate transaction, including the determination of the asking price strategy, searching for a trading partner, matching and negotiation strategy, obtaining a mortgage, and the closing. The significance of the role played by agents is also evident by the fact that they represent approximately 81% of single-family dwelling sales and total brokerage commission fees add up to more than $65.5 billion a year (Rutherford et al. 2005). Thus, it is not surprising that the literature paid a significant amount of attention to the principal-agent problems involved in the seller-broker relationship.

Another reason for the popularity of real estate brokerage in the academic literature is that brokerage commissions are typically a percentage of the transaction price and the commission percentage (usually 6%) is generally uniform across properties of different prices and regions. This commission structure has led to a long running debate about the incentive compatibility and competitiveness of the brokerage services. It has been argued that the percentage commission structure gives the broker only a small portion of the marginal benefits from additional effort, thus it fails to provide the right incentives to align the interests of the agent with those of the client. It has also been argued that since the cost of brokerage services do not increase linearly with the price of the property and since different regions have different costs of effort for brokerage services, the uniformity of the commission rates across different property prices and regions is incompatible with price competition, and thus is a sign of tacit collusion in the industry (see, for instance, Hsieh and Moretti 2003).

The topic has gained further attention recently by the Department of Justice’s antitrust lawsuit against the industry’s main trade association, the National Association of Realtors. The Department of Justice charges that Realtors are involved in such anti-competitive actions as boycotting listings by discount brokers and lobbying state legislatures to enact laws and regulations that would restrict brokers from offering rebates and incentives to consumers and impose minimum service requirements on real estate brokers. The purpose of these legislations is to effectively put down the lid on discount brokerage services. Such legislative attempts are perhaps a signal that the current structure of the industry is facing serious challenges from discount brokerage.

This special issue of the Journal of Real Estate Finance and Economics offers a timely visit to real estate brokerage. The collection in this special issue addresses a number of very interesting and important questions on brokerage.

In the only theoretical study of this special issue, “Is The Compensation Model For Real Estate Brokers Obsolete?” Miceli, Pancak and Sirmans argue that the two basic functions of real estate brokerage, matching and bargaining, have been significantly changed with recent developments in the industry, and these changes have made the current compensation structure obsolete. The matching function of the broker, the authors argue, has been significantly diminished by the improvements in information technology. According to the authors, the bargaining stage of the transaction has also been altered due to emergence of buyer brokerage. The selling agent used to represent the seller’s best interest up until 1990s, now the selling agent is, in majority of the cases, an agent of the buyer. However, while a legal relationship between the buyer and the agent has been established, the compensation model has not adjusted to this change. The selling agent still receives her commission from the seller and the commission is still a percentage of the transaction price. In addition to suggesting several changes, the authors derive a very interesting result; it is in the collective interests of brokers to eliminate competition among themselves for listings and allocate the entire commission to the broker who actually locates the buyer.

As an empirical compliment to Miceli, Pancak and Sirmans and most past theoretical models of real estate brokerage, the study by Rutherford, Springer, and Yavas, “Evidence of Information Asymmetries in the Market for Residential Condominiums,” offers a direct test of agency problems in the brokerage industry.Footnote 1 Using a large sample of condominium transactions, and controlling for sample selection and endogeneity, the authors find that real estate agents receive a premium of 3.0–7.0% when selling their own condominiums in comparison to similar client-owned condominiums. Their result is comparable to those observed for single-family houses, as reported in Rutherford et al. (2005) and Levitt and Syverson (2005). However, the agents are able to obtain a higher price for their condominiums by having to wait 3% longer to sell whereas they are able to obtain a price premium for their single-family houses without having to wait longer to sell. Thus, the study highlights that the agency problems exists in more homogenous condominium markets as well as in more heterogeneous single-family home markets, though the agency problem is less severe for condominium sales due to longer time on the market for agent-owned condominium units.

Gardiner, Kallberg and Liu, in the paper “The Impact of Dual Agency,” look at an interesting dimension of the agency problem and examine the role that a simple disclosure legislation could play. The authors consider the impact of dual agency (when the seller’s and the buyer’s agents are employed by the same real estate firm) on price and marketing time and study the impact of a law enacted in Hawaii in 1984 requiring real estate agents engaged in dual agency relationships to disclose this fact to both parties in writing. Dual agency creates an obvious challenge for the agent since the two principals, the buyer and the seller, have opposing objectives: the seller wants the highest price possible, the buyer seeks the lowest, and both principals reveal considerable amount of information to the agent about their reservation prices. The empirical analysis indicates that dual agency results in 8% smaller transaction prices and 8.5% shorter time on the market. After the introduction of the legislation that mandated disclosure of dual agency, the impact of dual agency on the price and time on market was reduced to 1.4 and 8.1%, respectively. What is also interesting is that the legislation significantly reduced the frequency of dual agency, from 43.8 to 28.2%. The results of the paper clearly have policy implications for other jurisdictions who do not have disclosure requirements.

The objective in “Individual Agents, Firms, and the Real Estate Brokerage Process” by Turnbull and Dombrow is to distinguish between firm-specific and agent-specific determinants of the selling prices and marketing time. The authors find that the sex of the agent plays no role in either listing or selling functions. However, agent specialization matters. Agents who specialize more heavily in listing functions obtain higher prices while agents who specialize more heavily in selling functions benefit the buyer by obtaining lower selling prices. This is an interesting result for the agency problems in the industry in that both the listing agent and the selling agent are seller’s agents and are expected to represent the best interests of the seller. The authors also check for economies of scale at the firm and agent level. While they find no evidence of economies or diseconomies of scale at the firm level, individual agents are subject to diseconomies of scale. Agents with a greater listing and selling activity lead to lower selling price or longer time on the market. On the other hand, they find geographic concentration by listing and selling agents yields higher prices. That is, a house closer to the other transactions of the listing or selling agent enjoys a higher selling price. Similarly, geographic concentration by firms leads to higher selling prices. Furthermore, the authors find that agents selling own listings (listing and selling agent the same) obtain the same price and selling time. As in the Gardiner, Kallberg and Liu study, houses listed and sold by different agents in the same firm sell for less. The natural unanswered theoretical question here is why dual agency plays a negative role, or any role, on the price.

The paper by Huang and Rutherford, “Who you going to Call? Performance of Realtors and Non-realtors in a MLS Setting,” explores whether or not the REALTOR® designation serves as a signal of the effectiveness of an agent. They compare the price and time-on-the-market for realtor listings with those of non-realtor listings on the MLS. The authors find that non-realtor properties list and sell at a lower price, take slightly longer to sell, and are less likely to sell than properties listed by Realtors. The implications of the results suggest that working with a Realtor in an MLS setting is advantageous to sellers when they list their properties. The Realtor designation appears to provide a signal of quality that is reflected in the sales price, the probability of sale, and time on the market.

In the last paper of the special issue, “Do Some People Work Harder Than Others?,” Benjamin, Chinloy, Jud and Winkler investigate the labor supply function in real estate brokerage industry. As the authors argue, real estate brokerage provides a nice opportunity to test some of the theories of labor supply because real estate agents and brokers set their own hours, based on their skills and compensation incentives. This is in contrast to most of other work environments where the employer sets the work hours. Utilizing data from a cross-sectional survey of 6,842 real estate licensees in 1999, the authors find that skills such as education, experience and licensee status generate higher wages, and schooling and experience decrease hours worked. They measure the labor supply elasticity with respect to the wage as 0.24. Contrary to popular belief, they find that part-time agents have higher unmeasured skills and obtain higher hourly wages.

The set of six papers in this collection address a small subset of issues in the brokerage industry. Nevertheless, they illustrate the multiplicity and the complexity of the problems in the industry for researchers and policy makers.