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The costs of free entry: an empirical study of real estate agents in Greater Boston
Author(s) -
Barwick Panle Jia,
Pathak Parag A.
Publication year - 2015
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12082
Subject(s) - inefficiency , real estate , revenue , constraint (computer aided design) , free entry , microeconomics , economics , fixed cost , value (mathematics) , function (biology) , finance , computer science , mathematics , geometry , machine learning , evolutionary biology , biology
This article studies the consequences of fixed commissions and low entry barriers in Greater Boston's real estate brokerage industry from 1998–2007. We find that agent entry reduces average service quality and use a dynamic empirical model to study the inefficiency in the current market structure. To accommodate a large state space, we approximate the value function using sieves and impose the Bellman equation as an equilibrium constraint. Our results suggest that a 50% cut in commissions would result in 40% fewer agents, social savings that amount to 23% of industry revenue, and 73% more transactions for the average agent.