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Agency Problems

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 215
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Alina Arefeva, University of Wisconsin-Madison

Market Distortions with Collusion of Agents

Zhenguo Lin
,
Florida International University
Yingchun Liu
,
University of North Texas
Jia Xie
,
California State University-Fullerton

Abstract

We investigate market distortions with collusion of agents. The notion that agents distort housing markets is quite straightforward. However, the issue that information advantaged agents collude with each other to maximize their own interests is elusive. This paper finds that with collusion of agents, the resultant principal-agent problem and market distortions become much bigger. Consistent with the literature, we find that agents distort markets by selling their own homes with price premium and clients' homes with price discount. We further find that with collusion of agents, the premium for agent-owned homes becomes much larger and the discounts for clients' homes are even higher.

Asymmetric or Incomplete Information about Asset Values?

Patrick Smith
,
San Diego State University
Crocker Liu
,
Cornell University
Adam Nowak
,
West Virginia University

Abstract

We provide a new framework for using text as data in empirical models. The framework identifies salient information in unstructured text that can control for multidimensional heterogeneity among assets. We demonstrate the efficacy of the framework by reexamining principal-agent problems in residential real estate markets. We show that the agent-owned premiums reported in the extant literature dissipate when the salient textual information is included. The results suggest the previously reported agent-owned premiums suffer from an omitted variable bias, which prior studies incorrectly ascribe to market distortions associated with asymmetric information.

Brokerage Choice, Dual Agency and Housing Market Strength

Michael Seiler
,
College of William and Mary
Xiangou Deng
,
Iowa State University
Hua Sun
,
Iowa State University

Abstract

This study develops a theoretical model supported by empirical evidence examining the relation between brokerage choice and market strength. Our model shows that although internal transactions (where both buyer and seller agents are either the same or work for the same firms) have the potential side benefits of higher commission and lower search costs to an agent, in a strong housing market, most brokerage firms still prefer external transactions because of the greater demand for housing. However, when the market weakens, external demand for housing decreases, and brokerage firms become more willing to engage in internal transactions. This occurs at the expense of lowering the selling price, which speaks to a principal-agent incentive misalignment problem. Our model demonstrates that the housing market has a self-correction mechanism for the principal-agent incentive misalignment problem as the market strengthens. Conversely, when the market weakens, internal transactions increase, prices in the market decline, which can further weaken the market. Hence, the equilibrium brokerage choice creates a self-reinforcing mechanism toward generating more extreme market conditions.

Causation of Dual Agency Transactions? Buyer Choices or Broker Manipulation: Theory and Evidence

Bennie Waller
,
Longwood University
Lingxiao Li
,
University of Wisconsin-Madison

Abstract

A significant portion of residential real estate transactions are dual agency transactions, a situation where the buyer and seller are represented by the same brokerage firm. Recent studies report alarming trends in dual agency transactions with occurrences as high as 48 percent. This study attempts to disentangle the underlying factors that impacts the likelihood of a dual agency transaction, and explores whether dual agency transactions are situational or amenable to influence or manipulation by the listing broker, buyer or seller? Do listing agents influence the terms of the listing contract or persuade the principal to include prohibitive conditions or restrictions (e.g., requiring listing broker to be present at showings) that increase the likelihood of a dual agency transaction? The findings suggest that there is evidence that some listing brokers engage in debatable practices that increase the likelihood of dual agency transactions such as offering the cooperating broker a lower commission split, negotiating longer listing contracts and limiting the amount of information provided in the MLS listing to the public and/or cooperating brokers. Our findings reflect that a listing broker offering a lower commission to cooperating brokers, 2-2.5% or 2.5-3% increases the likelihood of a dual agency transaction by 54% and 43% respectively, relative to a comparable property offering a rate greater than 3% to the cooperating broker. Results also indicate that MLS listing with limited comments or photos are also more likely to be dual agency transactions.
Discussant(s)
David Brasington
,
University of Cincinnati
Ruchi Singh
,
University of Georgia
Seung-Hyun Hong
,
University of Illinois-Urbana-Champaign
Sophia (Sonia) Gilbukh
,
New York University
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • D8 - Information, Knowledge, and Uncertainty