Residential Real Estate Brokerage Efficiency and the Implications of Franchising: A Bayesian Approach

This paper provides substantial evidence that real estate brokerage firms choosing to franchise are more cost-efficient than firms that remain independent. It uses 1995 cost data obtained from a nationwide survey of real estate brokerages to analyze the differences in firm efficiency across firm type-franchised and independent. We estimate a single stochastic cost frontier using Bayesian statistics and measure firm efficiency relative to that frontier conditional on firm type. The results indicate that real estate brokerages are relatively efficient, implying a competitive market, but franchised brokerages are substantially more efficient than their independent counterparts. Copyright American Real Estate and Urban Economics Association.