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Abstract
A recent development in finance is the application of the economic theory of agency to various aspects of the firm. This has led to plausible explanation for phenomena not explained by traditional theory (e.g., an explanation of the existence of complex financial instruments). The dissertation applies agency theory to real estate markets and tests the implications of the theory as it applies to residential real property transfers.
The flat-fee and percentage commission listing contracts are examined and it is shown that neither leads the agent to an optimal amount of search from the seller's point of view. It is hypothesized that agents either search for the highest bid if no minimally acceptable price (MAP) is specified, or that they search for a buyer willing to pay a specified MAP. With a MAP there is uncertainty as to whether the property will be sold during the listing period. Without a MAP there is uncertainty as to the price at which the property will be sold. The relative desirability of the commission systems is shown to depend on whether a MAP is specified and on how quickly the owner wishes to sell. The flat-fee commission system is shown to have inferior incentive effects when the owner wishes to sell for the highest bid found in the search process. With a MAP the flat-fee and percentage commission systems have identical incentive effects. With or without a MAP, the identical level of search can be obtained using the percentage commission.
Empirical tests for the incentive effects of percentage commissions on both home selling price and time on market are conducted. No selling price effect is found. This is consistent with sellers having a MAP. No time on market effect is found. This is inconsistent with the theory and can be explained by market forces not captured in the model.
