Should you trust your real estate agent or your bankruptcy attorney?

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Agents are often better informed than the clients who hire them and may exploit this informational advantage. Real-estate agents, who know much more about the housing market than the typical homeowner, are one example. Because real estate agents receive only a small share of the incremental profit when a house sells for a higher value, there is an incentive for them to convince their clients to sell their houses too cheaply and too quickly. We test these predictions by comparing home sales in which real estate agents are hired by others to sell a home to instances in which a real estate agent sells his or her own home. In the former case, the agent has distorted incentives; in the latter case, the agent wants to pursue the first-best. Consistent with the theory, we find homes owned by real estate agents sell for about 3.7 percent more than other houses and stay on the market about 9.5 days longer, even after controlling for a wide range of housing characteristics. Situations in which the agent’s informational advantage is larger lead to even greater distortions.

Source: “Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions” from NBER Working Paper No. 11053, Issued in January 2005

 

Households often rely on professionals with specialized knowledge to make important financial decisions. In many cases, the professional’s financial interests are at odds with those of the client. We explore this problem in the context of personal bankruptcy. OLS, fixed effects, and IV estimates all show that attorneys play a central role in determining whether households file under Chapter 7 or Chapter 13 of the bankruptcy code. We present evidence suggesting that some attorneys maximize profits by steering households into Chapter 13 bankruptcy even when the households’ objective financial benefits are low and the probability of case dismissal is high. An attorney-induced Chapter 13 filing increases household legal fees and reduces the probability of long-term debt relief.

Source: Lefgren, Lars; McIntyre, Frank L.; and Miller, Michelle (2010) “Chapter 7 or 13: Are Client or Lawyer Interests Paramount?,” The B.E. Journal of Economic Analysis & Policy: Vol. 10: Iss. 1 (Advances), Article 82. 

The first study was co-authored by Steven Levitt and was featured in his wonderful book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything.

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