Comments:

The Tragedy of the Commission

Chang-Tai Hsieh University of California, Berkeley

• Fixed 5-6 percent commission
  
  =>Commission increases one-to-one with price of house.
  => Highly unlikely that time spent on selling houses increases one-to-one with price.

Boston and Minneapolis in 1990

• Cost of housing:
  - Boston: $200,000
  - Minneapolis: $100,000

• Productivity of average real-estate agent:
  - Boston: 3.3 houses/agent
  - Minneapolis: 6.6 houses/agent

^{Boston and Minneapolis in 1980}

• Productivity of average real-estate agent:
  - Boston: 6 houses/agent
  - Minneapolis: 7 houses/agent

• Cost of housing
  - Boston: $100,000
  - Minneapolis: $100,000

• The tragedy of the commission
  - Real-estate agents in Boston are no better off

^{Empirical Evidence:}

• 282 Metropolitan areas
• In cities where housing prices have increased:
1. More real-estate agents
2. Lower productivity (sales per agent)

3. Real wages are the same

What do real-estate agents do?

• ^{Matching buyers and sellers}
• Prospecting

- door to door canvassing
- cold calling
- notepads with realtor's picture
- calling on FSBOs
- servicing a "farm"
- free pumpkins

• Prospecting is of marginal social value
• Fraction of time spent on prospecting increases with number of other real-estate agents.

Do realtors in high cost cities provide higher "quality" service?

- We compare the same cities over time.

- Use only differences in housing costs due to price of land.

- Direct measures of time spent by agents on "useful" activities.

1. Time spent by realtors selling houses
2. Time spent by realtors assisting buyers

How Much is the Social Waste?

- Total Earnings in 1990: $16 billion
- Benchmark City is Athens, GA
- Waste is $8.2 billion

^{The Tragedy of the Commission}

- Price protection ultimately does not benefit price protectors.