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

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Author Info
Steven D. Levitt
Chad Syverson

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11053.

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Date of creation: Jan 2005
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Handle: RePEc:nbr:nberwo:11053

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L8 - Industrial Organization - - Industry Studies: Services
R2 - Urban, Rural, and Regional Economics - - Household Analysis

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ronald Rutherford & Thomas Springer & Abdullah Yavas, 2007. "Evidence of Information Asymmetries in the Market for Residential Condominiums," The Journal of Real Estate Finance and Economics, Springer, vol. 35(1), pages 23-38, July. [Downloadable!] (restricted)
  2. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  3. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," NBER Working Papers 13360, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Simon Loertscher & Andras Niedermayer, 2007. "When is Seller Price Setting with Linear Fees Optimal for Intermediaries?," Diskussionsschriften dp0706, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
    Other versions:
  5. B. Douglas Bernheim & Jonathan Meer, 2008. "How Much Value Do Real Estate Brokers Add? A Case Study," NBER Working Papers 13796, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Alan Beggs & Kathryn Graddy, 2008. "Failure to meet the reserve price: the impact on returns to art," Journal of Cultural Economics, Springer, vol. 32(4), pages 301-320, December. [Downloadable!] (restricted)
    Other versions:
  7. Abdullah Yavas, 2007. "Introduction: Real Estate Brokerage," The Journal of Real Estate Finance and Economics, Springer, vol. 35(1), pages 1-5, July. [Downloadable!] (restricted)
  8. Paul E. Carrillo, 2005. "Assessing the Value of On-line Information Using a Two-sided Equilibrium Search Model in the Real Estate Market," Computing in Economics and Finance 2005 307, Society for Computational Economics. [Downloadable!]
  9. Christopher C. Afendulis & Daniel P. Kessler, 2006. "Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care," NBER Working Papers 12623, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Lan Shi & Christina Tapia, 2009. "The Disciplining Effect of Concern for Referrals for Better Informed Agents: Evidence from Real Estate Transactions," Working Papers UWEC-2009-06, University of Washington, Department of Economics. [Downloadable!]
  11. David Barker, 2008. "Ethics and Lobbying: The Case of Real Estate Brokerage," Journal of Business Ethics, Springer, vol. 80(1), pages 23-35, June. [Downloadable!] (restricted)
  12. Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management. [Downloadable!]
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