In-House Transactions in the Real Estate Brokerage Industry: Matching Outcome or Strategic Promotion?∗

Over 20% of residential real estate transactions are in-house transactions, for which buyers and sellers are represented by the same brokerage. To investigate the underlying mechanisms that generate these in-house transactions, we first construct a search model that predicts two types of in-house transactions with different implications for market efficiency. The first is strategic promotion in that a cooperating agent may influence buyers’ choices by directing their interest to houses listed by his brokerage firm. The second is a matching outcome in that brokerage firms may specialize in certain segments of housing markets, thus attracting interest from buyers and sellers with similar tastes. Using home transaction data from a large metropolitan area, we find that agents are more likely to promote houses listed by their own firms when they receive promotion bonus from the firms and when buyers have higher search cost. The results are robust even after we control for efficient matching due to information advantages and transaction efficiencies. We then develop a structural model of in-house transactions to quantify the extent of strategic promotion and further evaluate welfare consequences of a legislation that requires agents to disclose dual agency relationship to their clients. We find that while about 70% of inhouse transactions can be explained by efficient matching, the remaining are caused by agents’ strategic promotion. In addition, the legislation has weakened the impact of agents’ strategic promotion on the home allocation process, which accounts for 41% of the decrease in in-house transactions before and after the regulatory change.