So this has nothing to do with the economics of law firms, but
it has a lot to do with professional behavior under incentive regimes. Two
economists at the University of Chicago have published a paper analyzing whether realtors (representing the seller of a home)
work as hard on their client’s behalf and extract as much value
for a home as they do when they’re working for themselves, selling
their own home.
Have you already guessed or shall I tell you? As competently
summarized by The
New York Times, in a study of nearly 100,000 home sales over
ten years (1992—2002) outside Chicago, realtors selling their
own homes typically kept it on the market 9.5 days longer and secured
a median price 3.7% higher than a comparable home for sale by you
or me. Unprofessional? A breach of duty to the client?
Not
so fast: Because of the commission structure, there is truly
little in it for the realtor to hold out very long for a better
offer that may, of course, never come. Although the standard
6% commission is, in my opinion, scandalously high and prima
facie evidence that the National Association of Realtors constitutes
a cartel, the seller’s individual realtor only gets one-quarter
of that 6%, or 1.5% (their half of the half that goes to their
firm).
So for a $500,000 home, the agent would get $7,500—say,
for 10 days’ work. Now suppose they could add 3.7% to
the price by working for another 10 (OK, 9.5) days. The house
would now sell for $518,500, and their net gain in income for doubling
their efforts would be $277.50. $7,500 or 10 days work or $7,777.50
for 20 days? But when selling their own home they of course
get to keep at least 95.5% of the incremental price (assuming 1.5%
still goes to their own firm and 3.0% to the buyer’s realty firm).
Now comes the important part: Recall that this particular
10-year period spans from pre- to post-internet. Pre-internet
(1992—1995), the difference in favor of the realtor’s own
home was 14 more days on the market and a 4.9% higher price. Post-internet
(2000—2002), the numbers shrank to a 2.9% higher price and 2.5 more
days on the market. Thank you, realtor.com!
Something similar (see below)
is happening to the mainstream media courtesy of the blogosphere: The
cartel’s power is under siege from newly-widely distributed data.
Don’t you hate it when your
information advantage starts to be eroded?
