Journal of Real Estate Finance and Economics, 23:1, 77±94, 2001
# 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
A Study of the Brokerage Cost Allocation in a Rental
Housing Market with Asymmetric Information
The Arison School of Business, The Interdisciplinary Center Herzliya, Herzliya 46150, Israel
We analyze the brokerage service cost allocation in the rental housing market. We explain the alleged inconsistent
phenomenon of landlords only occasionally requiring tenants to incur mediation cost. We show that when
asymmetric information is introduced, under which tenants' tenure horizon is unobservable to landlords, a
separating equilibrium may be attained, in which the length of the tenant's tenure horizon is directly related to his
share in the brokerage commission. Finally, we empirically examine and con®rm a set of the model's assumptions
and derivations within the rental housing-market framework.
Key Words: symmetric information, brokerage, rental housing
In examining the seller-broker-buyer triangle, the real estate economic literature is
primarily concerned with those aspects of the process through which landlords are
matched with potential buyers. Particularly, attention is devoted to issues that accompany
the broker's role in the transaction. The research thus concentrates on topics such as the
effect of the mediator on the determined sale price, the optimal commission schedule for
the brokerage service, agency problems that arise between the landlord and the real estate
agent, and the effect of multiple listing services on the broker's strategy.
It is important to note, however, that the literature mentioned above chie¯y focuses on
one speci®c type of real estate transaction: the sale of a dwelling unit. Studies of the role of
brokers in transactions involving rental of dwelling units are surprisingly limited in
numbers. This neglect is puzzling in light of the considerable market share of rental
transactions within real estate property rights exchanges.
The existing rental housing economic literature predominantly focuses on factors
affecting vacancy rates (see Rosen and Smith, 1983; Guasch and Marshall, 1985a, 1985b;
Gabriel and Nothaft, 1988; Read, 1988a, 1991a), variables affecting housing quality (see
Miceli, 1989; Read, 1991b), and landlord's pricing strategies (see Stull, 1978; Marshall
and Guasch, 1983; Read, 1988b; Miceli and Sirmans, 1999).
Nevertheless, none of the above rental housing market studies incorporates the broker's
role in the transaction. The objective of our study is to investigate the landlord's optimal
strategy for allocating mediation cost in the presence of a broker. The attained equilibrium
generates testable implications with respect to the distribution of rental prices, vacancy
duration, and tenure duration.