The efficiency of franchising in the residential real estate brokerage market

Franchising has been present in the residential real estate brokerage market for many years. Today, nearly one of every five firms in this sector is organized as a franchise and one of every three agents works for an affiliated organization. Despite this high incidence of franchising, no current study has addressed how the decision to franchise impacts productive efficiency levels for these firms. The current paper measures the productive efficiency levels of real estate brokerage firms by employing data envelopment analysis (DEA). DEA was used to estimate overall, allocative, technical, pure technical, and scale efficiency levels for a set of franchised and non‐franchised firms gathered by the National Association of Realtors. The results suggest that firms in general are productively inefficient. Franchised firms were found to be more efficient in allocating resources, while non‐franchised firms were shown to be more scale and technically efficient.