Is the Division of Labor Limited by the Extent of the Market? Opportunity Cost Theory with Evidence from the Real Estate Brokerage Industry

The division of labor allows individuals to focus their time on a narrower band of activities and increase productivity through specialization, but this comes at a cost. When individuals divide labor, they divide value and split the “pie” they help create. In this paper, I formally model this tradeoff and examine how it is affected by opportunity-cost considerations due to market characteristics. I then test the empirical predictions of the model in the residential real estate brokerage industry in Southeast Michigan. Consistent with the predictions, I find that the division of labor is more likely for properties in the midrange of the price distribution and in larger markets, but less likely at the tails and in markets where property prices exhibit substantial heterogeneity.