How not to Reduce Commissions of Real Estate Agents. Evidence from Germany.

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This paper studies a legal reform in Germany, which aims to lower commission rates of real estate agents. I find that the reform has backfired and real estate agents have exploited the transition to increase their commission rates. The findings document that several real estate agents increase their commission by up to 2 percentage points, adding over €6,000 in transaction cost to the average home sale. I argue that this arbitrary increase points to seller ignorance. To verify if and why sellers fail to induce price competition, I run a pre-registered survey experiment with 1,062 real estate agents. The survey confirms that 85% of sellers do not attempt to negotiate lower commission rates. The randomized experimental questions suggest that real estate agents may cater to the low willingness to negotiate by providing misleading reference commissions and shrouding the economic incidence for sellers.

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