A Case for Percentage Commission Contracts: The Impact of a “Race” Among Agents |
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Authors: | Lynn M Fisher Abdullah Yavas |
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Institution: | (1) Department of Urban Studies and Planning, Center for Real Estate, MIT, 77 Massachusetts Ave., W31-310, Cambridge, MA 01239, USA;(2) Smeal College of Business Administration, Pennsylvania State University, 381 Business Building, University Park, PA 16802, USA |
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Abstract: | In standard principal-agent problems, the issue at hand is how to align the interests of the agent with those of her principal.
A commonly used contract involves the principal paying the agent a percentage of the sale price as commission. With respect
to real estate brokerage contracts, it has been argued that percentage commission contracts fail to provide sufficient incentives
to the agent. This paper re-evaluates the standard solution to a one seller, one agent agency problem by introducing more
than one agent. It is shown that percentage commission contracts can induce first-best effort levels from agents. The result
is due to the negative externalities created by the winner-takes-all race among agents. The optimal commission rates in this
model are inconsistent, however, with the observed uniformity in commission rates across markets in the USA. |
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