Unburden Renters by Making Landlords Pay the Commission? Evaluating a Policy Reform in Germany

Abstract

When renting an apartment, often a commission is payable by the renter. In a perfect market, standard economic reasoning predicts the rental price for an apartment with a commission payable by the renter to be lower than the price for the same apartment without commission. We test this hypothesis against an alternative hypothesis based on insights from behavioral economics about mental accounting, inattention, and cognitive limitations. We apply a difference-in-differences strategy exploiting a law reform in Germany in June 2015 determining that a landlord is no longer allowed to make a renter pay the commission for a real estate agent the landlord ordered. Using a panel dataset we thus compare price changes (pre–post reform) of apartments without a commission prior to the reform with price changes of apartments with a commission prior to the reform. Based on our results we reject the standard reasoning hypothesis of differing prices; moreover, we cannot reject the behavioral hypothesis of equal prices.