Search Results
Briefing
How Exclusive Homebuyer Representation Contracts Help Keep Commissions High
Real estate agents use exclusive buyer representation contracts to capture homebuyers and thus limit outside options of home sellers.With outside options severely limited, home sellers pay high commissions (up to 6 percent) to sell their homes on the platform of real estate agents.A ban on exclusive buyer representation contracts is strongly pro-competitive: It improves the sellers' outside options and forces the platform to reduce real estate commissions to constrained-efficient levels.
Briefing
Community Development Financial Institutions as a Means to Overcome Market Failures
Neighborhood and information externalities can lead to market failures, leaving communities underinvested and underprovided with financial services.Community development financial institutions (CDFIs) can serve as a means of implementing government subsidies aimed at overcoming these market failures.To spur positive externalities, however, CDFI investments must clear a critical mass threshold, which they do not appear to have been able to achieve to date.
Briefing
The Differing Effects of the Business Cycle on Small and Large Banks
Small banks and large banks respond differently to business cycle fluctuations. The average net interest margin (NIM) at large banks is negatively correlated with the business cycle, while the average NIM at small banks is positively correlated with the business cycle. In a popular view, small banks are different from large banks because of their close relationships with their borrowers. But a decomposition of the cyclical properties of NIM into the asset and liability sides of the balance sheet suggests that small banks' procyclical NIM is due to their ability to keep funding costs less ...
Briefing
Systemic risk regulation and the "too big to fail" problem
A single regulator tasked with preventing threats to systemic stability would need to have considerable power and discretion. But creating such a powerful entity could reinforce the moral hazard problem resulting from the idea that some firms are too big to fail.
Briefing
Understanding Market Failure in the 2007-08 Crisis
Did market failures cause the 2007-08 financial crisis? While economists have made substantial progress exploring this question, the answer remains unclear. The answer is important because financial regulation that does not address a specific market failure risks causing new inefficiencies and unintended consequences in the financial system and broader economy. To demonstrate how economic theory can be used to identify market failures and guide policy, this Economic Brief discusses a common market failure called a "pecuniary externality" and demonstrates the pitfalls of applying regulations ...
Briefing
Federal Reserve MBS Purchases in Response to the COVID-19 Pandemic
The Federal Reserve’s purchases of agency mortgage-backed securities — launched in response to financial disruptions caused by COVID-19 — appear to have restored smooth market function supporting the continued flow of credit to mortgage borrowers. However, the amount of purchases necessary to achieve this outcome raises concerns about the resilience of private-market structures that perform this critically important function
Briefing
When Should Employees Be Suspended Instead of Fired?
The economic theory of incentives explains why a worker who consistently underperforms must be fired. To respond to incentives, the worker must maintain a stake in the relationship with the employer. When the worker's stake runs out, the relationship must terminate. This article reviews recent research showing that this explanation is oversimplified. A temporary suspension of the worker is usually sufficient to rebuild the worker's stake, which allows the productive relationship to resume without terminating. The costs and benefits of suspending the worker, however, can be highly sensitive to ...
Briefing
Removing Conflict of Interest for Agents of Homebuyers
In real estate transactions, sellers' agents have weak incentives to market homes sufficiently long to secure top prices for their clients. Buyers' agents, however, face completely backward incentives: They get paid more when their clients pay more for their homes. We discuss an a la carte compensation model for buyers' agents that eliminates this conflict of interest.
Briefing
Real Estate Commissions and Home Search Efficiency
In the U.S. residential housing market, homebuyers' agents typically offer free house showings and collect a commission equal to 3 percent of the price of the home bought by their clients. Our analysis shows that, by deviating from cost basis, this compensation structure may lead to elevated home prices, overused agent services and prolonged home searches. We explain that shifting to a simple a la carte compensation structure may improve home search efficiency and social welfare.