Article: Market Distortions when Agents are Better Informed: The Value of Information in Real Estate
Authors: Steven D. Levitt & Chad Syverson
Summary of the article
Because of specialization, individuals rely heavily on the advice of experts in making decisions. For activities as varied as medical treatment, automobile repair, legal matters, planning for retirement, or selling a home (to name just a few), there are experts with particular skills, knowledge, and experience willing to provide their services. A defining characteristic of transactions involving the hiring of an expert is the informational advantage enjoyed by the expert relative to the client seeking advice. As a result of this private information, expert agents may mislead their clients by exaggerating the costs or difficulty of a solution, providing unneeded services, or otherwise distorting the information to maximize the expert’s own payoff.
This research focuses on the relationship between a real estate agent (broker) and a home seller. The broker generally receives a fraction of the selling price of a house, but simultaneously captures many cost of sales (advertising, home visits, etc.). Leading to the pursuit of different goals of both parties: the brokers benefits from faster selling a house, even though the price is not optimal. This allows clients to quickly accept lower bids, because they don’t know the optimal price.
Research method and data collection
Unlike most experts (e.g. medical specialists), brokers use their expertise not only for their clients. They also sell their own house. When a broker sells his own house, he efforts to get the highest possible prize. In this study are the differences in ´sales price´ and the ´selling time´ examined between a broker who sells his/her own house and when he sells the house of a client. They used a data set...