The Costs of Free Entry: Evidence from Real Estate Brokers in Greater Boston

Abstract

This paper studies the real estate brokerage industry in Greater Boston using a panel data set that covers 257,923 properties and 10088 brokers from 1999 to 2007. We establish several stylized facts regarding entry and exit among real estate agents. First, more than 12% of active real estate agents have entered the profession within the previous year, while about 10% of active agents exit each year. Second, patterns of entry and exit depend on market and time-series trends: agents are more likely to enter in markets and time periods with housing price appreciation. Third, agents with three or more years of experience earn 60% more than agents with fewer than three years of experience and are 35% less likely to exit. These facts motivate our structural econometric model in which we quantify welfare implications of free entry under the current fixed commission structure in the real estate brokerage industry. The paper also develops a new method that allows estimation and counter-factual analysis for high dimensional dynamic models. Our counter-factual results suggest that when average commissions are halved, agent entry reduces by 51%, the exit rate more than doubles, and social savings amount to 30% of industry revenues.