Friday, October 26, 2007

Does your agent use the information advantage against you?

We hire an expert because he knows more. But does the expert use that information advantage for you or against you? Steven Levitt of the Freakonomics fame, looked at how real estate agents did when they sold their own houses versus those of their clients. You can read the original academic paper here.

Freakonomics is an international bestseller where Steven Levitt and Stephen Dubner explore the hidden side of everything. In a lucid manner they explain how the incentives of the real estate business, for example, encourages the agents to act against the best interests of their customers!

Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent’s informational advantage is larger lead to even greater distortions.

How do we reduce the information disadvantage? Internet is a powerful way. We need more information power on sites like one I have started

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