Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis

Many people in North America believe that prevailing commission rates for residential real estate brokers are too high, even though such beliefs are not based on a formal model. This paper presents a general equilibrium model of the housing market in which real estate brokers serve as matching intermediaries. We use this model to construct an illustrative example which is calibrated using data consistent with a typical housing market. The example suggests that the commission rate which maximizes aggregate efficiency is considerably below the prevailing rate. Moreover, this finding appears to be robust to changes in the matching process.