The Economic Functions of Referrals and Referral Fees

Peter F Colwell and Charles Kahn

The Journal of Real Estate Finance and Economics, 2001, vol. 23, issue 3, 267-96

Abstract: As the real estate market becomes more complex, the role of middlemen becomes more central to its efficient operation. Middlemen take on informational roles including marketing, screening, and matching. The real costs incurred in many of these roles are not included in the regulatory authorities' calculations of permitted costs, and become, under RESPA, prohibited as referral fees. This discourages development of innovative packages of products. Regulation specifying the standards for disclosure of referral fees can serve a useful purpose. But the model in this article shows that in at least some circumstances customers will prefer to do business in an environment in which middlemen can choose not to reveal information about any particular referral fee they receive. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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