The effect of asymmetric information in real estate agent commissions

Sammanfattning: Real Estate Agencies compensation consists of commissions and a part of the commission corresponds to what the real estate agent gets as salary. This incentive-based commission system is usually covered by an agreed fixed amount, a variable commission model or a combination of both depending on the brokerage object's final selling price. Commission system can lead to adverse consequences when the real estate agent abuses their position and exploits an information advantage to gain a financial benefits. Based on completed questionnaires, that have been posted for this study, directed to consumers and real estate agents, it is recognized that the parties in the Swedish real estate agent industry has experienced or is experiencing a certain unethical behavior because of commission-based pay structures. The purpose of this thesis is to examine how asymmetric information affects the real estate industry brokerage contract negotiations regarding the commission and whether conflicts of interest may occur due to this. Because of asymmetric information in contract situations, there may be situations in which agreements will contradict societal norms and ethical principles, because the broker abuses his advantage. The essence of this thesis is to convey a discussion in order to associate the legal application of contracts with normative ethics. The essay writers propose for instance based on ethical approaches to create a complement to the existing law and further to come up with practical solutions to limit the possibility of unreasonable commission models in real estate brokerage. The essay writers argue that the introduction of a stricter supervision of the commission procedure would create stronger assurance and reduce the abuse of the information asymmetry in the industry.