Fundamentals of Comparative Analysis between Dual Agency and Cross Agency in Real Estate Market

Abstract

Dual agency, representing both the buyer and the seller in the same transaction, has recently garnered the public’s attention in Japan with an increasing doubt on its fairness and efficiency in the market. Although a number of empirical studies have examined the relationship between different types of agency and transaction prices, only few theoretical studies assess the pros and cons of the agency system exist. This paper aims to offer a fundamental model to analyze the role of dual agency as determinants of price and probability of a successful transaction. This model predicts that the price under dual agency transaction is higher than the price under cross-agency transaction, in which a buyer and a seller have different agents. The probability of transaction under the dual agency transaction is shown to be higher (lower) than the probability under the cross-agency transaction when the variation of sellers’ reservation prices is small (large). It is also shown that an agent, who has attempted to close a deal under dual agency transaction but failed to do so, has an incentive to significantly lower the price, instead of switching to a cross-agency transaction