The Tragedy of the
Commission
Chang-Tai Hsieh
University of California, Berkeley
• Fixed 5-6 percent commission Ö Commission increases one-toone with price of house. Ö Highly unlikely that time spent on selling houses increases one-to-one with price.
Boston and Minneapolis in 1990 • Cost of housing: - Boston: $200,000
- Minneapolis: $100,000
• Productivity of average real-estate agent: - Boston: 3.3 houses/agent - Minneapolis: 6.6 houses/agent
Boston and Minneapolis in 1980 • Productivity of average real-estate agent: - Boston: 6 houses/agent - Minneapolis: 7 houses/agent • Cost of housing - Boston: $100,000
- Minneapolis: $100,000
• The tragedy of the commission - Real-estate agents in Boston are no better off
Empirical Evidence: • 282 Metropolitan areas • In cities where housing prices have increased: 1) More real-estate agents 2) Lower productivity (sales per agent) 3) Real wages are the same
What do real-estate agents do? • Matching buyers and sellers • Prospecting - door to door canvassing - cold calling - notepads with realtor's picture - calling on FSBOs - servicing a "farm" - free pumpkins • Prospecting is of marginal social value • Fraction of time spent on prospecting increases with number of other real-estate agents.
Do realtors in high cost cities provide higher "quality" service? - We compare the same cities over time. - Use only differences in housing costs due to price of land. - Direct measures of time spent by agents on “useful” activities. 1) Time spent by realtors
selling houses
2) Time spent by realtors
assisting buyers
How Much is the Social Waste? - Total Earnings in 1990: $16 billion
- Benchmark City is Athens, GA - Waste is $8.2 billion
The Tragedy of the Commission - Price protection ultimately does not benefit price protectors.
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Commission Rate
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100000
200000 Price of Housing
300000
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10 Log Total Earnings of Brokers in City 12 12 14 16 18 14 16 Log 6% of Value of Houses Sold in City 18
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-1 log wage - log alternative wage -.5 0 1 2 0 .5 Changes in log(Average Price of Houses in City) 1
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1 log (Time on The Market) 10 1.5 2.5 2 1990
11 12 log(Average Price of Houses in City)
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9.5 log (Average Price of Houses in City)
log price
11 12 10 13
FTC 5/30/2008 |
95 |
0 |
0 |
legal
FTC 5/30/2008 |
52 |
0 |
0 |
legal
FTC 5/30/2008 |
53 |
1 |
0 |
legal
FTC 5/30/2008 |
51 |
0 |
0 |
legal
FTC 5/30/2008 |
55 |
0 |
0 |
legal
FTC 5/30/2008 |
25 |
0 |
0 |
legal
FTC 5/30/2008 |
41 |
0 |
0 |
legal
FTC 5/30/2008 |
55 |
0 |
0 |
legal
FTC 5/30/2008 |
73 |
0 |
0 |
legal
FTC 5/30/2008 |
43 |
0 |
0 |
legal
FTC 5/30/2008 |
47 |
0 |
0 |
legal
FTC 5/30/2008 |
7 |
0 |
0 |
legal
FTC 5/30/2008 |
48 |
0 |
0 |
legal
FTC 5/30/2008 |
109 |
0 |
0 |
legal
FTC 5/30/2008 |
63 |
1 |
0 |
legal
FTC 5/30/2008 |
80 |
0 |
0 |
legal
FTC 5/30/2008 |
53 |
0 |
0 |
legal
FTC 5/30/2008 |
59 |
0 |
0 |
legal
FTC 5/30/2008 |
71 |
0 |
0 |
legal
FTC 5/30/2008 |
62 |
0 |
0 |
legal
FTC 5/30/2008 |
73 |
0 |
0 |
legal
FTC 5/30/2008 |
73 |
0 |
0 |
legal
FTC 5/30/2008 |
65 |
0 |
0 |
legal
FTC 5/30/2008 |
70 |
0 |
0 |
legal