X-Inefficiencies in the Residential Real Estate Market: A Stochastic Frontier Approach

Abstract

This article examines the productive efficiency levels present in the market for residential real estate brokerage services by employing the stochastic frontier approach. The only prior study (Anderson, Zumpano, Elder and Fok, 1998) that examined productive efficiency in this sector employed data envelopment analysis. This current article addresses potential statistical limitations of Data Envelopment Analysis and uses an alternative statistical tool, the stochastic frontier approach, to estimate X-efficiencies. This technique overcomes many of the statistical limitations of DEA and provides additional productive efficiency estimates. The results suggest that residential real estate brokerage firms are relatively efficient, in contrast to the earlier study that found significant inefficiencies present in this market. Firms could only reduce their average total costs by 12% given firm outputs and input prices. Additionally, the firms were divided into three size categories to examine the impact of firm size on efficiency. The results indicate that small firms are the most efficient group. Hence, there seems to be a tradeoff between scale efficiency and productive efficiency.