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

This article provides an empirical framework to study entry and cost inefficiency in the real estate brokerage industry. We develop 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. We estimate the model, using the Census data. Based on our cost estimates, we find strong evidence for cost inefficiency under free entry, particularly attributable to wasteful non-price competition. We further use the estimated model to evaluate welfare implications of the rebate bans that currently persist in some U.S. states. We find that removing rebate bans would decrease the equilibrium number of real estate agents by 5.14% and reduce total brokerage costs by 8.87%