How many listings are too many? Agent inventory externalities and the residential housing market

Given the significant role of real estate agents in the housing market, this study examines how agents' incentives regarding the size of their listing inventories indirectly affect residential home prices and liquidity. The theory shows that taking on additional inventory generates a critical principal-agent issue, resulting in the dilution of an agent's selling effort and, ultimately, creating an externality that adversely impacts housing market outcomes across listings. It remains an empirical question whether diluted sales effort leads to lower prices, longer time on market, or both. The empirical results reveal significant inventory externality effects, as greater agent inventory tends to reduce selling price and substantially reduce liquidity for clients' properties in this market.