TITLE:
The Information and Bargaining Roles of Commercial Brokers When Investors Are Uninformed
AUTHORS:
Jonathan A. Wiley, Yu Liu, Liang Guo, Paul Gallimore
KEYWORDS:
Principal-Agent, Commercial Real Estate
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.5,
June
27,
2019
ABSTRACT: Market outcomes are contrasted for uninformed
investors with and without broker representation to evaluate the information
role, and for parties opposing the
uninformed (with and without representation) to evaluate the bargaining role.
The setting is a sample of 17,000 office building transactions in more than 100
US markets, and the identification strategy for uninformed investors is based
on the nonlocal clientele effect. Nonlocal investors buy high and sell low, paying significant premiums in
acquisitions and accepting discounted offers in divestitures. Employing a commercial broker is
found to have virtually
zero impact on this disparity. Moreover, when the opposite party has broker
representation, the degree of overpayment by nonlocal buyers is even higher.
These findings are at odds with the conventional notion that brokers possess a
high degree of specialized market knowledge which can be used to offset
informational disadvantages suffered by their clients.