Journal of Real Estate Finance and Economics, 18:3, 259±277 (1999)
# 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Buyer Brokerage: Incentive and Ef®ciency
Smeal College of Business Administration, 409 BAB, Pennsylvania State University, University Park,
Of®ce of Real Estate Research, 304 DKH, University of Illinois, 1407 West Gregory Drive, Urbana,
This article examines the incentive and ef®ciency implications of buyer brokerage. We show that it is possible to
perfectly align the interests of the seller with those of his agent and the interests of the buyer with those of his
agent. Furthermore, effort levels can be ef®cient. This result is a departure from earlier conclusions in the
literature that the agent's effort level can neither be perfectly aligned with the principal's interests nor be ef®cient.
The departure is primarily due to the feature of our model that it recognizes the costs as well as the bene®ts of an
agent's effort to her principal, and vice versa. Finally, we discuss the implications of buyer brokerage for the
future of MLS services.
Key Words: buyer brokerage, ef®ciency, incentives, search, externalities
A revolution in agency has occurred in recent years. The decline of subagency and the rise
of buyer brokerage has been one of the most notable features of this revolution. A principal
reason for the substitution of buyer brokers for subagents is the liability created when
subagents misrepresent their agency to buyers (for example, by acting as if they represent
buyers). This creates an undisclosed dual agency. Another source of liability is in-house
sales where the listing agent and the selling agent work for the same brokerage ®rm.
Subagency has been the source of confusion for both brokers and clients and has the
potential to lead to signi®cant broker liability suits. In a recent case, Dismuke v. Edina
Realty, Inc., for instance, the plaintiffs alleged that the ``brief '' agency disclosure
statement that they were provided with was not enough to fully inform them about the
consequences of in-house sales (Black, 1994).
A second reason for the rise of buyer brokerage is the recently introduced mandatory
agency disclosure form. It is generally believed that buyers have not been well informed as
to their relationship to the selling agent. Thus, the agency disclosure requirement provides
explicit information to the buyers as to who the selling agent represents and may have
driven buyers to buyer brokers.