Conflicts of Interest and Agent Heterogeneity in Buyer Brokerage

Abstract

This paper investigates the incentives of agents working with buyers (buying agents) under the fixed percentage commission system (FPCS) and the implications on housing market outcomes. Our model shows that the FPCS without a binding contract between the buyer and the buying agent could produce outcomes that are more equitable for buyers. The reason is that the absence of a binding contract helps mitigate the conflict of interest between the buyer with her agent and ensures a more faithful behavior of the buying agent. Our model shows that agent heterogeneity plays an important role in determining the binding force of the FPCS in the absence of a binding contract. Results from simulations and empirical analyses using house transactions in Canada support our model predictions.