Is Dual Agency in Real Estate Transactions a Cause for Concern?

Abstract

We study dual agency in residential real estate, where the same agent/agency represents both the buyer and seller. We assess the extent to which dual agency suffers from an inherent conflict of interest, where the dual agent furthers the interest of one client at the expense of the other client’s, as well as principal-agent incentive misalignment where the agent furthers her own interest at the expense of one or both clients. And, we examine how these incentive conflicts affect agent behavior and transaction outcomes. To do so, we analyze 10,891 residential real estate transactions in Long Island, NY, from 2004- 2007. Specifically, we (i) identify how dual agency is correlated with house prices and time-to-sale, (ii) describe and assess agent behaviors that could generate these correlations, and (iii) provide some intuition as to the economic effects of prohibiting dual agency in real estate transactions. We find that the incidence of dual agency is uncorrelated with sale price and negatively correlated with time-to-sale. However, on very fast deals, list prices and sale prices are significantly higher on houses sold via dual agency. These findings are consistent with first-resort selling (agents first showing houses to in-house buyer clients) and strategic pricing (agents inducing their seller clients to set a higher list price in anticipation of an internal client agreeing to it) on some deals, in conjunction with agents leaning on sellers to accept a lower sale price on other deals. First-resort selling is indicative of incentive misalignment, while the latter two behaviors reflect a conflict of interest: strategic pricing transfers surplus from the buyer to the seller, and leaning on the seller transfers surplus from the seller to the buyer. Further, our results indicate little difference between dual-agent (same agent) and within-agency (same agency, but different agent) deals. Our findings provide some evidence of distorted outcomes associated with dual agency, mainly on fast deals, but the evidence indicates mild overall effects, suggesting that prohibiting the practice is not likely to substantially increase welfare.