Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions

Abstract

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent’s informational advantage is larger lead to even greater distortions. Other possible explanations, such as a lower effort on the part of agent when serving clients, lower discount rates on the part of agents, or unobserved differences in housing quality, appear less likely to account for the observed differences. * We would like to thank Gary Becker, David Card, Vincent Crawford, Roland Fryer, Edward Glaeser, Michael Greenstone, Jens Ludwig, Chris Mayer, Tobias Moskowitz, Kevin Murphy, Derek Neal, François Ortalo-Magné, Canice Prendergast, Phil Reny, Andrei Shleifer, three anonymous referees, and the editor Daron Acemoglu for helpful discussions and advice. Elias Bruegmann and Marina Niessner provided truly outstanding research assistance. Thomas Fumo aided us in obtaining the data. Financial support provided by the National Science Foundation. Correspondence can be addressed to either of the authors at Department of Economics, University of Chicago, 1126 E. 59 Street, Chicago, IL 60637.

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@inproceedings{Levitt2008MarketDW, title={Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions}, author={Steven D . Levitt and Chad Syverson and Gary S. Becker and David Card and Vincent P. Crawford and Roland G. Fryer and Edward L . Glaeser and Michael Greenstone and Jens Ludwig and Chris M. Mayer and Tobias Moskowitz and Kevin Murphy and Derek William Neal}, year={2008} }