The Firm as the Nexus of Relational Contracts: An Empirical Assessment of Real Estate Brokers

Abstract

The theory of the firm has long recognized that the separation of ownership from control may cause a firm to take actions that would not be taken were managers to have incentives identical to those of the firm's owners. Empirical studies have examined the actions of managers who are not adequately monitored and who have incentives that directly conflict with those of the owners. Other studies have examined the relationship between the choice to integrate a firm vertically and circumstances that are hypothesized to be related to differential levels of transaction costs. This Article alternatively examines the consequences of dividing the responsibilities of an agent between two firms, relative to engaging a single firm to perform the same duties. The transactions studied consist of a sample of 1,247 single family dwelling sales in a jurisdiction that followed the traditional legal rule, under which a selling brokerage firm in a transaction consummated through the auspices of the MLS acts as a sub-agent of the listing brokerage firm, absent an express contractual agreement to the contrary.

This study provides evidence that a division of the responsibilities of the seller's agent between two firms is associated with a statistically significant decrease in the sales price realized by the seller, where the selling agent usually acts in the capacity of selling agent. Some models find such a statistically significant decrease, independent of the frequency with which the selling agent acts as a selling agent. These findings are consistent with the hypothesis that there may be lesser transaction costs arising from engaging a single firm to perform two distinct but related tasks, relative to the transaction costs arising from engaging different firms to perform the two tasks, notwithstanding the absence of any variation in the applicable duties under law. That differential might be characterized as representing a component of the value arising from the ability to form a firm--to form a "nexus of contracts". As this study provides evidence that the extent of integration within a single firm of a set of related duties can affect the extent of compliance with those duties, this study supports the notion that a firm, in this context, should be viewed as a nexus of relational contracts.

JEL Classification: G31, G32