Testing Cost Inefficiency Under Free Entry in the Real Estate Brokerage Industry

Abstract

This article provides an empirical framework for studying entry and cost inefficiency in the real estate brokerage industry. We present a structural entry model that exploits individual level data on entry and earnings to estimate potential real estate agents’ revenues and reservation wages, thereby recovering costs of providing brokerage service. Using U.S. Census data, we estimate the model and find strong evidence for cost inefficiency under free entry, attributable in particular to wasteful nonprice competition. We further use the estimated model to evaluate welfare implications of the rebate bans that currently persist in some U.S. states. Supplemental materials are provided online.