Essays in entry and exit, social inefficiency and commission rates in housing market




Gheblealivand, Seyed Parviz

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In the first paper, using a dataset of the records of Texas Real Estate Agents, I reexamine the findings of Hsieh and Moretti (2003) regarding the inefficiency of free entry in real estate industry: first, I point out one important source of misidentification in that paper's analysis of the relationship between home prices and the number of real estate agents in a city. This misidentification stems from not including the ratio of houses sold in a city to its labor force size as an explanatory variable. Failure to account for this variable will result in inflated coefficient for the effect of home prices on the percentage of real estate agents in a city's labor force. Second, I analyze the effect of home prices on productivity of real estate agents. Empirical evidence supports theory prediction of inverse relationship between home prices and productivity of its real estate agents (measured as the number of houses sold per agent) and the empirical results in Hsieh and Moretti (2003). Third, I investigate the relationship between the extra wages of real estate agents (defined as average earning net of agents' outside option) and home prices in a city. In support for free entry, I find no evidence of any such relationship.

In theory, free entry potentially leads to social inefficiency. This paper finds strong empirical evidence consistent with excess entry into Texas Residential Real Estate Brokerage Industry and studies the effects of heterogeneity and future uncertainty on such inefficiencies. I develop a dynamic model of entry and exit with heterogeneous agents and modify the predictions of the earlier literature. I show that the heterogeneity among (real estate) agents results in a weaker relationship between the real estate commission fees and the number of real estate agents. I also show that the models developed for static cases in the previous papers are special cases of the more general model in this paper.

The model allows us to explain the lower business stealing effect compared to static and homogeneous models that is observed in the data. To address the issue of excess entry, I separate the business stealing effect from demand driven entry and find that on average 75 percent of entry is due to business stealing. To evaluate free entry, I control for agents' outside options and find that the extra wages of the real estate agents do not vary with housing prices.

The objective of the third paper is to study the determinants of commission rates in the two-sided market of real estate brokerage industry and explain the emergence of the MLS and its impact on commission rates. In addition to their commission rates, real estate agencies decide on their MLS policies as well: they can either list the property with the MLS and share information about it, or not list the property with the MLS. If a property is listed with the MLS, all MLS subscribers can see the listing and send their potential buyers to see that property. Potential buyers can go to any agency to purchase such a property. If the property is \textit{not} listed with the MLS, to buy a house, a buyer must go to the same agency that the seller has signed up with.

Since sellers pay the commission fees, and buyers no longer have to go to the same agency, with MLS listing, buyers choose the closest agency regardless of the commission rates charged by the agencies. Therefore, changes in the commission rates only change the affiliation of the sellers and not that of the buyers. This leads to a softer competition under MLS listing as agencies compete only in the seller side of the market. The softer competition and resulting higher commission rates are desirable to the agencies. They prefer the MLS listing outcome and given the optimal strategies after observing each other's listing decisions, agencies weakly prefer listing to no listing. I show that the one period game has two Nash Equilibria in which either both real estate agencies choose to list their houses with the MLS, or both decide not to list their houses with the MLS. The no listing equilibrium forces buyers to work through that agency's agents and effectively ties the both sides of the market. The higher commission rate equilibrium of the game allows buyers to choose either agency and reduces the competition to the sellers side. Softer competition in turn, results in higher equilibrium commission rates and higher profits along the equilibrium path.




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