Buyer Brokerage: Incentive and Efficiency Implications

This article examines the incentive and efficiency implications of buyer brokerage. We show that it is possible to perfectly align the interests of the seller with those of his agent and the interests of the buyer with those of his agent. Furthermore, effort levels can be efficient. This result is a departure from earlier conclusions in the literature that the agent's effort level can neither be perfectly aligned with the principal's interests nor be efficient. The departure is primarily due to the feature of our model that it recognizes the costs as well as the benefits of an agent's effort to her principal, and vice versa. Finally, we discuss the implications of buyer brokerage for the future of MLS services.     

Mergers and marginal costs: New evidence on hospital buyer power

We estimate the effects of hospital mergers, using detailed data containing medical supply transactions (representing 23% of operating costs) from a sample of US hospitals, 2009–2015. Pre‐merger price variation across hospitals (Gini coefficient 7%) suggests significant opportunities for cost decreases. However, we observe limited evidence of actual savings. In this retrospective study, targets realized 1.9% savings; acquirers realized no significant savings. Examining treatment effect heterogeneity to shed light on theories of “buyer power,” we find that savings, when they occur, tend to be local, and potential benefits of savings may be offset by managerial costs of merging.     

Costly search with adverse selection: solicitation curse versus acceleration blessing

We analyze a dynamic trading model of adverse selection where a seller can increase the frequency of strategic price quotes. A low‐quality seller benefits more from trade and, therefore, searches more intensively than a high‐quality seller. This makes a seller's contact carry negative information but a seller's availability become a stronger indicator of high quality. In the stationary environment, the two effects exactly offset each other, and reducing search costs is weakly beneficial to the seller. In the nonstationary environment, the relative strengths of the two effects vary over time, and reducing search costs can be detrimental to the seller.     

Search,learning, and tracking

In many search markets, some consumers search to learn both the price and their willingness-to-pay whereas others search only to learn prices. When a seller can track indicators of the likelihood that consumers already know their willingness-to-pay, I show that price discrimination reduces profits and welfare relative to uniform pricing if search costs are small, but may increase both if search costs are large. The analysis also applies to sequential search if learning causes the likelihood that consumers know their willingness-to-pay to depend on the search history.     

Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions

We study the welfare costs of business cycles in a search and matching model with financial frictions. The model replicates the volatility on labor and financial markets. Business cycle costs are sizable. Indeed, the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. In addition, in a nonlinear framework, large welfare costs of fluctuations are explained by the high average unemployment and the low job finding rates with respect to their deterministic steady‐state values.     

House Price Markups and Mortgage Defaults

The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, matching, and search costs, generating what we term “markups” above or below the average market price. We measure markups for 3.4 million purchase-money mortgages and show that they can predict mortgage defaults and credit losses conditional on default even after accounting for collateral coverage (loan-to-value ratio) and a comprehensive set of other covariates. The findings suggest that standard collateral coverage estimation may be inaccurate, with implications for both individual and portfolio-level credit risk assessment.     

Single sourcing versus multiple sourcing

We show that in contrast to results in the extant literature, single sourcing may not be the optimal strategy of a buyer facing suppliers with strictly convex costs. As we argue, previous findings relied crucially on the joint assumption that, first, there is only a single buyer and that, second, procurement takes place in an auction organized by the buyer. Relaxing these restrictions, we obtain a richer set of results. In particular, we show that even in the original setting, where suppliers bid, committing to single sourcing is only optimal if the respective buyer controls a sufficiently large fraction of the whole procurement market.     

Optimal information revelation in procurement schemes

A buyer procuring a single input possesses private information about each potential supplier's degree of fit with the buyer's needs. She can search among suppliers either sequentially or simultaneously. As long as the distribution of the fit parameter is not overly skewed to the left, sharing information with suppliers yields intensified price competition under simultaneous search. Moreover, the buyer cannot benefit by providing suppliers additional information beyond their own fitness parameter. Information revelation is never optimal with sequential search.     

Search costs and apartment rents

Differences in apartment rents are explained with a hedonic equation that includes property management variables omitted in prior studies. Our joint hypotheses are that differences in contributions to rent exist among property managers as a function of their ability to reduce search costs to renters and that the manager's fee for providing search-cost-reducing information is reflected in the amount of rent paid. Two proxies for the level of search costs are found to be positively and significantly related to the rent level.     

Buyers' and sellers' agents in the housing market

We explain why buyers in the housing market use an agent employed by the seller. Such agents reduce buyers' search costs so that more buyers search a particular house. This increases the probability of the sale of the house and possibly also its selling price. However, since the selling price increases, if at all, by less than the fee paid by the seller to the agent, both buyers and sellers are better off. We identify two characteristics that give rise to sellers' agents and show that markets that do not have such agents are missing at least one of these characteristics.     

First-Best Equilibrium in Insurance Markets With Transaction Costs and Heterogeneity

We investigate extensions of the classic Rothschild and Stiglitz (1976) (RS) model of adverse selection under asymmetric information. In RS, low‐risk customers are worse off owing to an externality created by high‐risk buyers in the market. We find critical changes in insurance buyers' behavior under the joint assumptions of transaction costs and buyer heterogeneity with respect to either risk aversion or wealth. Combining transaction costs and heterogeneity, we find a separating equilibrium in which neither high‐risk nor low‐risk individuals are penalized due to information asymmetry.     

List price signaling and buyer behavior in the housing market

To determine whether list price contains useful information for anticipating trends in eventual transactions prices, we develop a model of buyer behavior from a search-theoretic perspective. Using data from the Baton Rouge, Louisiana, housing market between 1985 and 1992, we estimate separate price indexes with list price and selling price as the respective dependent variables in the hedonic regressions. Consistent with our theory, we find that the list price may lead the market when functioning as a signal of seller intent, but list price will probably lag a market driven by buyer willingness to purchase. Granger causality tests conducted on quarterly data for the eight-year study support listing price as a leading indicator of selling price. However, an examination of the indexes around the period of market reversal suggest otherwise. Indeed, listing prices appear to contain the least useful information at the times when information would be most valuable: at the peaks and troughs of the market cycle.     

The impact of switching costs on vendor financing

We show that vendor financing appears in equilibrium as the result of repeated trade interactions between a buyer and a supplier when changing supplier is costly. Competition between suppliers forces them to offer a rebate before the relationship is initiated and switching costs allow the buyer to borrow from the supplier in the first period and to roll over the debt until the end of the relationship. The sequence of transfers is similar to a long-term financing structure. Our model suggests that switching costs allow small business owners to smooth their dividend income by using vendor financing.     

Rent control with rationing by search costs: A note

This note derives the long-run implications of rent controls when rent-controlled apartments are implicitly rationed to tenants who are more efficient in searching for apartments in the controlled sector. Rent controls are shown to involve transfers that essentially are from some to other tenants, as well as dead-weight losses due to higher search costs that are borne by tenants. Key to this analysis is the condition that, at the margin, rent plus the higher cost of search for a rent-controlled apartment must equal rent in the noncontrolled sector.     

Corporate philanthropic practices

We study corporate philanthropy using an original database that includes firm-level data on dollar giving, giving priorities, governance, and managerial involvement in giving programs. Results provide some support for the theory that giving enhances shareholder value, as firms in the same industry tend to adopt similar giving practices and firms that advertise more intensively also give more to charity. But much of our evidence indicates that agency costs play a prominent role in explaining corporate giving. Firms with larger boards of directors are associated with significantly more cash giving and with the establishment of corporate foundations. Consistent with effective monitoring by creditors, firms with higher debt-to-value ratios give less cash to charities and are less likely to establish foundations. The empirical work considers the impact of industry regulation on giving and controls for state philanthropy laws and fiduciary responsibility laws.     

Prices and heterogeneous search costs

We study price formation in a model of consumer search for differentiated products in which consumers have heterogeneous search costs. We provide conditions under which a pure‐strategy symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density.     

Online Search Frequency,Retail Investor Overreaction,and the Cross-Section of Stock Returns: Evidence from the Chinese Stock Market

I find a strong negative relation between online search frequency and future returns on the Chinese stock market. I suggest that this effect captures retail investor overreaction to unexpected signals, because online search frequency reflects the efforts made by investors to obtain firm-specific knowledge. The effect is particularly strong in stocks with high information uncertainty (high analyst dispersion, big past earnings surprises, low analyst coverage, and large trading volume), whose intrinsic values are difficult or costly for investors to estimate. Online search frequency as a direct indicator of retail investors’ reaction to signals also sheds light on the idiosyncratic volatility (IVOL) puzzle. I find that this puzzle is more pronounced in high-search-frequency subsamples and disappears in low-search-frequency subsamples. Further evidence shows that high search frequency strengthens the negative IVOL effect in stocks with positive signals but weakens this effect in stocks with negative signals. I suggest that the IVOL puzzle in the Chinese market can be partially explained as a reversal following overreaction to positive signals by retail investors.     

Reinsurance and Capital Structure: Evidence From the United Kingdom Non‐Life Insurance Industry

Using a data set consisting of statutory returns of U.K. non‐life insurers from 1985 to 2002, I find that insurers with higher leverage tend to purchase more reinsurance, and insurers with higher reinsurance dependence tend to have a higher level of debt. My results are consistent with the expected bankruptcy costs argument, agency costs theory, risk‐bearing hypothesis, and renting capital hypothesis. I also find that the impact of leverage on reinsurance will be weaker for insurers that use more derivatives than those that use less. Moreover, high levels of derivative use increase the leverage gains attributable to reinsurance.     

Do cosmetic reporting variations affect market behavior? A laboratory study of the accounting emphasis on unavoidable costs

Eight laboratory market sessions are conducted in which sellers have both opportunity costs (default redemption values from not trading) and unavoidable costs (fixed outlays that must be paid irrespective of trading). The treatment variation is whether sellers’ intermediate accounting reports compare sales revenues to unavoidable costs (four sessions) or default redemption values (four sessions). Findings indicate systematically higher seller asks and buyer bids in the condition where accounting emphasizes unavoidable costs. However, the price and efficiency implications of these higher asks and bids are offset by simultaneous shifts in the relative frequencies of seller-initiated and buyer-initiated trades.     

Effects of Competition on Insurance Contract Formation

For an insurance transaction between a single risk-averse buyer and single risk-neutral seller with positive transaction costs, it is well known that the buyer will prefer a policy contract with an ordinary deductible. More detailed results demonstrate the Pareto optimality of an insurance contract characterized by a deductible (followed by coinsurance) for a single risk-averse buyer and single risk-averse seller. In the present work, we employ a market-game model to solve for the equilibrium insurance contract. This formulation, which approximates the behavior of excess property insurance and property catastrophe reinsurance markets, reveals that the equilibrium policy is described by full insurance up to a given policy limit, with no deductible or coinsurance. Our analysis shows further that this solution persists regardless of the numbers of buyers and sellers in the market, and in particular that the market-game equilibrium does not converge to a Pareto-optimal result because of boundary constraints on the number of sellers. Finally, we test our price-formation mechanism against an important generalization, and find that the policy-limit contract persists.