Traditional commissions and few barriers for new agents create billions of dollars of waste in the real estate industry—and neither consumers nor agents benefit, according to a new study.

In the study, published this month in The Journal of Political Economy, authors Chang-Tai Hsieh and Enrico Moretti spell out how and why the generally accepted 6 percent sales commission in the real estate industry goes awry.

In "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," Hsieh and Moretti, both researchers at the nonprofit National Bureau of Economic Research, use mathematical formulas to show how earnings from commissions quickly become warped in areas marked by rising housing costs, and how agents flooding hot markets dilute one another's efficiency.

Central to the study is the idea of "social waste" – in essence, spending resources that have no redeeming value to anybody. Agents themselves don't benefit, because a hot housing market draws more agents into the business and splits their profits. And consumers are certainly hurt by paying larger sums for essentially the same amount of work.

What is social waste?

"It's money being spent by somebody that, in the end, nobody benefits from," Hsieh, currently an economics professor at the University of California, Berkeley, said. "You can think of it as money thrown into the ocean."

"What's really funny about the real estate broker business is we're paying a lot more money, but at the end of the day, the Realtors are not benefiting from the system. It's completely social waste," he said.

The study points out the illogic by using the following scenario: At 6 percent, the commission paid on a $500,000 home is $30,000, but for a $100,000 condo, the commission is only $6,000. While the authors account that more work was needed to sell the $500,000 home, the service differential doesn't equal a $24,000 difference in commission.

"The apparent uniformity of commission rates presents an enormous puzzle, especially if one believes that the cost and effort necessary to sell a house do not increase one-to-one with the price of housing," the authors wrote.

The authors don't put a single monetary figure on social waste in the real estate industry, but estimate that in 1990 it ranged from $1.1 billion (the most conservative estimate) to $8.6 billion. The number of excess agents that year could have been anywhere from about 64,000 to 423,000 of a total of 777,000.

The primary factor in the authors' study is the issue of "free entry," or in other words, how relatively easy it is to become a licensed real estate agent.

In most states, someone who wants to sell real estate only needs to take a night class or two and pass a state examination. The number of active agents typically rises and falls with every real estate cycle. But when a housing market heats up, many agents enter the fray, and more bodies end up sharing the wealth.

And when agents in higher-priced markets aren't selling homes, they're spending more time prospecting for new clients amid an increasingly crowded field.

"The cost of finding a customer increases with the number of Realtors in the market, without necessarily generating additional benefits to the customer," the authors wrote.

Retraced in the study is the issue of standard commissions, which landed the real estate industry in a lot of hot water during the 1970s.

It was then that many Realtor organizations published recommended commission rates, which were generally set at 6 or 7 percent and which were enforced through the Realtors' control over real estate listing data. Antitrust action by the Justice Department ended the practice.

While the authors use Census statistics mostly dating between 1980 and 1990, their argument could still apply today.

The barriers to becoming a real estate agent have changed little over the past 20 years, and home prices in multiple markets have soared more than 100 percent under the largest real estate boom in history. The National Association of Realtors recently estimated its total membership had reached a record 952,000.

Meanwhile, 6 percent is still the most commonly used commission rate. But industry costs could be dropping, albeit slowly. Hsieh and Moretti write this could be changing with the growing crowd of discount brokerages and slight downturn in average commission rates.

Hsieh said he would have to look at the data, but added there is anecdotal evidence that the Internet and discount brokerage models are having some effect.

"Something may have changed," he said.

What hasn't changed, apparently, is the stigma of anti-competition in the real estate business.

The Justice Department has once again launched an antitrust investigation into the industry, specifically into NAR's virtual office Web site policy. Critics contend NAR's VOW policy allows real estate brokers to "punish" discount brokers by not allowing them to publish real estate listing data.

When it comes to social waste, however, Hsieh and Moretti do not suggest that real estate suffers more than other business.

"I suspect the same is true when thinking about a lot of other things, like competition in the cereal industry," Hsieh said. "I don't know what the benefit is to introducing all those varieties."