TY - JOUR AU - Hsieh,Chang-Tai AU - Moretti,Enrico TI - Can Free Entry be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry JF - National Bureau of Economic Research Working Paper Series VL - No. 9208 PY - 2002 Y2 - September 2002 UR - http://www.nber.org/papers/w9208 L1 - http://www.nber.org/papers/w9208.pdf N1 - Author contact info: Chang-Tai Hsieh Booth School of Business University of Chicago 5807 S Woodlawn Ave Chicago, IL 60637 Tel: 773/8340590 Fax: 484-589-3583 E-Mail: chsieh@chicagoBooth.edu Enrico Moretti University of California, Berkeley Department of Economics 549 Evans Hall Berkeley, CA 94720-3880 Tel: 510/642 6649 Fax: 510/643 7042 E-Mail: moretti@econ.berkeley.edu AB - Real estate agents in the US typically charge a 6 percent commission, regardless of the price of the house sold. As a consequence, the commission fee from selling a house will differ dramatically across cities depending on the average price of housing, although the effort necessary to match buyers and sellers may not be that different. We use a simple economic model and cross-city data to measure the effect of the fixed commission rate on market entry by real-estate agents. We show that if the commission rate does not vary and if there are low barriers to entry to the real-estate brokerage business, the entry of real-estate agents into cities with high housing prices is socially inefficient. Consistent with our model, we find that when the average price of land in a city increases, (1) the fraction of real-estate brokers in a city increases; (2) the productivity of an average real-estate agent (houses sold per hour worked) falls; and (3) the real wage of a typical real-estate agent remains unchanged. We can not completely rule out the alternative explanation that these results reflect unmeasured differences in the quality of broker services. However, we present evidence that as the average price of housing in a city increases, there is only a small increase in the amount of time a buyer spends searching for a house, and the average time a house for sale stays on the market falls. ER -