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Diffused effort, asset heterogeneity, and real estate brokerage

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We generalize the classic Williams (1998 RFS) brokerage model by introducing diffused effort and asset heterogeneity. The term ”diffused effort” refers to the fact that an agent can cross‐utilize effort spending on one listing to another. One counterintuitive finding in Williams' paper is the absence of the agency problem. As a special case in our model, we recover the agency problem. We demonstrate the positive externality due to the diffused effort and show it depends on the agent's inventory size. Hence, there is a trade‐off between agents' effort committed to existing listings and expanding network size by soliciting new listings. This article is protected by copyright. All rights reserved

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... Ross (1973); Jensen and Meckling (1976) -Managerial entrenchment Demsetz (1983); Fama and Jensen (1983); Shleifer and Vishny (1989); Edlin and Stiglitz (1995) -"Free cash flow theory" Jensen (1986) Underpricing of Equity Offerings -"Winner's curse" Rock (1986); Beatty and Ritter (1986) -Information revelation Benveniste and Spindt (1989); Benveniste and Wilhelm (1990); Spatt and Srivastava (1991); Chemmanur (1993) -Signaling (Allen and Faulhaber, 1989;Grinblatt and Hwang, 1989;Welch, 1989) Market Reaction to Equity Offerings -"Pecking order theory" Greenwald et al. (1984); Myers and Majluf (1984); Myers (1984) -Implied cash flow change Ross (1978); Miller and Rock (1985) Trading Costs (Copeland and Galai, 1983;Glosten and Milgrom, 1985;Kyle, 1985;Admati and Pfleiderer, 1988) Reviews (theory and empirics) -Corporate finance Myers (2001); Eckbo et al. (2007); Graham and Leary (2011) -Corporate governance Shleifer and Vishny (1997); Brown et al. (2011) This table lists a selection of papers that researchers reference as providing a theoretical basis for tests on information frictions in public real estate markets. Anglin and Arnott (1991); Arnold (1992); Yavaş and Colwell (1999); Rutherford et al. (2005) Dynamic Miceli (1989b); Geltner et al. (1991) Competition for sellers Williams (1998); Fisher and Yavaş (2010); Li et al. (2021) Buyer representation Yavaş and Colwell (1999); Kryzanowski et al. (2022) Reviews (theory and empirics) Miceli et al. (2007); Zietz and Sirmans (2011); Han and Strange (2015) This table lists a selection of papers that researchers reference as providing a theoretical basis for tests on information frictions in real estate brokerage markets. Rutherford et al. (2005Rutherford et al. ( , 2007 (2017) ...
... However,Han and Strange (2015) point out that this iconoclastic "no-conflict" result flows from restrictive assumptions and may not hold if those are relaxed. 83 Lending prescience to Han and Strange's observation,Li et al. (2021) have recently recovered the finding of agency conflicts in a generalized version of the Williams model. ...
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The efficiency of the real estate market is a major concern for homeowners, investors, lenders, policymakers, and researchers. Modern academic literature has mostly moved beyond an early emphasis on formal tests of informational efficiency. The Grossman and Stiglitz (The American Economic Review 70:393–408, 1980) paradox holds that perfect informational efficiency is impossible and the joint hypothesis problem implies that market efficiency is not even testable. Instead, researchers now commonly examine the speed, accuracy, and persistence of price movements in response to new information, as the allocative efficiency of a market ultimately depends on its degree of informational (and operational) efficiency. This special issue is devoted to exploring these issues.
... However, Han and Strange (2015) point out that this iconoclastic "no-conflict" result flows from restrictive assumptions and may not hold if those are relaxed. 83 Lending prescience to Han and Strange's observation, Li et al. (2021) have recently recovered the finding of agency conflicts in a generalized version of the Williams model. ...
... One seller, one agent Anglin and Arnott (1991); Arnold (1992); Yavaş and Colwell (1999); Rutherford et al. (2005) Dynamic Miceli (1989b); Geltner et al. (1991) Competition for sellers Williams (1998); Fisher and Yavaş (2010); Li et al. (2021) Buyer representation Yavaş and Colwell (1999); Kryzanowski et al. (2022) Reviews (theory and empirics) Miceli et al. (2007); Zietz and Sirmans (2011); Han and Strange (2015) 84 Hendel et al. (2009) is a noteworthy exception. The authors compare home sales advertised on an online FSBO platform with brokered sales from the local multiple listing service in Madison, Wisconsin for 19,982,005. ...
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... The probability distribution of the maximum offer is affected by the number of offers accumulated during the time period and the distribution of each individual offer. It is common in the literature to assume that stochastic arrivals of potential buyers are independent, and that the strength of the market demand can be represented by a Poisson process, that is, assuming that the offers are drawn from a countably infinite population [2], [27], [28], [29], [30], [31], [32]. We assume also that the individual offers of potential buyers are generated from a known probability distribution that reflects the market valuation on the property [2], [28], [29]. ...
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Markets for many real assets are characterized by sequential search followed by bilateral bargaining between matched buyers and sellers. For a category of real assets, the joint, intertemporal valuation problems of buyers, owners, and sellers, and the associated Nash pricing function are solved explicitly. In equilibrium, the average transaction price is a noisy, proportional random walk, and the liquidity premium is positive for matched owners. Depending on the values of the parameters, the liquidity premium can be substantial. In a related problem of optimal development with costly search, the optimal exercise point, cost of development, and value of the undeveloped asset are calculated analytically. With search, development can occur sooner and undeveloped assets have lower market values than the standard solution without search.
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Brokerage contracts for many categories of real assets are characterized by a common, constant commission rate payable upon sale, exclusive agency, and contractual asking prices. For a large market in steady state, these conventional contracts produce in equilibrium no agency problem between a broker and his clients. Each broker spends the same time or effort selling each client's asset as the broker would spend on his own assets. As in standard agency problems, extra effort by a broker generates first-order stochastically dominant distributions of bids by potential buyers. Unlike standard agency problems, each broker can allocate his time or effort between selling the assets of his multiple clients and searching for new clients in competition with other brokers. Because brokers' time spent searching for new sellers is dissipative, entry by brokers is excessive in equilibrium.
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In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial may turn into a disaster when the defendant goes bankrupt. "Rainmakers" face the following dilemma: the greater the success in court, the greater the defendant's bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant's bankruptcy as well as Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance may have different impacts on the outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, can under certain conditions have the opposite effect: it may decrease the settlement result. -- Wir untersuchen, welchen Einflu� Forderungsausfallversicherungen auf das Vergleichsergebnis zwischen den Parteien eines Zivilprozesses nehmen kann. Je gr��er der Erfolg der Kl�gerseite in Proze� oder Vergleich, desto gr��er ist das Risiko, da� der Beklagte bankrott geht (das "rainmaker's dilemma"). Wir erg�nzen ein simples Proze�modell mit perfekter und vollst�ndiger Information um diese Bankrottm�glichkeit, und f�hren Forderungsausfallversicherungen sowohl im Hinblick auf das Vergleichsergebnis ("Vergleichsversicherung") und das Proze�ergebnis ("Proze�versicherung") ein. Wir zeigen, da� beide Versicherungsarten unterschiedliche Einfl�sse auf das Vergleichsergebnis nehmen k�nnen. W�hrend die Proze�versicherung die strategische Situation des Kl�gers verbessern (also eine "strategische Versicherung" ist), kann die Vergleichsversicherung das Vergleichsergebnis sogar senken.
Article
In this paper, we analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A huge success in a settlement or trial may turn into a disaster when the defendant goes bankrupt. "Rainmakers" face the following dilemma: the greater the success in court, the greater the defendant's bankruptcy risk. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant's bankruptcy as well as Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance may have different impacts on the outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, can under certain conditions have the opposite effect: it may decrease the settlement result. -- Wir untersuchen, welchen Einflu� Forderungsausfallversicherungen auf das Vergleichsergebnis zwischen den Parteien eines Zivilprozesses nehmen kann. Je gr��er der Erfolg der Kl�gerseite in Proze� oder Vergleich, desto gr��er ist das Risiko, da� der Beklagte bankrott geht (das "rainmaker's dilemma"). Wir erg�nzen ein simples Proze�modell mit perfekter und vollst�ndiger Information um diese Bankrottm�glichkeit, und f�hren Forderungsausfallversicherungen sowohl im Hinblick auf das Vergleichsergebnis ("Vergleichsversicherung") und das Proze�ergebnis ("Proze�versicherung") ein. Wir zeigen, da� beide Versicherungsarten unterschiedliche Einfl�sse auf das Vergleichsergebnis nehmen k�nnen. W�hrend die Proze�versicherung die strategische Situation des Kl�gers verbessern (also eine "strategische Versicherung" ist), kann die Vergleichsversicherung das Vergleichsergebnis sogar senken.
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