Abstract
Using 1994±1995 microeconomic data from the National Association of Realtors (NAR), this article estimates
cost and pro?t X-ef?ciency levels in the residential real estate brokerage market using traditional and Bayesian
stochastic frontier models. We ?nd that ?rms err more from failure to maximize pro?ts than from failure to
minimize costs. To determine what characteristics inˉuence ef?ciency, we perform a regression analysis. The
results show that franchising and ?rm age are associated with increases in ef?ciency, while MLS af?liation and
producing a balanced output of listings and sales decrease performance. Finally, we estimate economies of scale
and ?nd compelling evidence that ?rms are operating at increasing returns to scale.
Key Words: real estate brokerage, X-ef?ciency, economies of scale
1. Introduction
This article analyzes the ef?ciency of residential real estate brokerage ?rms from a cost
and pro?t perspective. Recent ef?ciency studies pertaining to this industry have neglected
to analyze pro?t ef?ciency. Examining ef?ciency using a pro?t function allows us to
capture inef?ciencies that result from choosing a suboptimal output level or mix in
addition to choosing a suboptimal input level or mix. In a residential real estate brokerage
context, a relatively high input-cost ?rm may appear very inef?cient if only costs are
examined but may be relatively ef?cient in an overall or pro?tability sense. For example, a
high input-cost ?rm may be able to list and sell more homes, attract more customers, and
gain market share due to the quality of their service. In an overall sense, such a ?rm may
not be inef?cient and should not be classi?ed as such. Berger et al. (1993) show that ?rms
may err on both on the input and output sides. As such, ef?ciency should be examined
from both perspectives to provide a true depiction of the level of ef?ciency present in the
market.
This study uses cross-sectional data collected from the 1994±1995 NAR Income,
Expense, and Pro?t SurveyDa time period characterized by greater economic prosperity
than similar data sets that date back to the early 1990s. Due to low interest rates and a
strong economy, the last several years have been witness to record sales volumes for both
new and existing homes. The 1990s have also seen the institutionalization of interactive
marketing arrangements via the Internet that currently complement but may soon replace
the more traditional use of the multiple listing service (MLS). To correctly assess the
impact of these changes on operating performance, additional research needs to focus on
residential real estate pro?t ef?ciency.
|
