Is the division of labor limited by the extent of the market? Opportunity cost theory with evidence from the real estate brokerage industry

Abstract

AbstractResearch SummaryThe division of labor allows individuals to focus their time on a narrower band of activities and increase productivity through specialization, but this comes at a cost. When individuals divide labor, they divide value and split the “pie” they help create. In this article, I formally model this tradeoff and examine how it is affected by opportunity‐cost considerations due to market characteristics. I then test the empirical predictions of the model in the residential real estate brokerage industry in Southeast Michigan. Consistent with the predictions, I find that the division of labor is more likely for properties in the midrange of the price distribution and in larger markets, but less likely at the tails and in markets where property prices exhibit substantial heterogeneity.Managerial SummaryToday, with the diffusion of digital labor markets and the emergence of the gig economy, the organization of economic activity relies on an ever‐finer division of labor. In this article, I examine how the division of labor is affected by the cost of dividing value, which emerges when middlemen take a cut of transaction revenues. Using data from real estate, I find the cost of dividing value can increase agents' incentives to cut out the middleman for high‐value and low‐value transactions, especially when the disparity between valuable transactions and the rest is large and when the availability of valuable transactions is limited. These findings shed light on the mechanisms aggregating individual endeavors into broader economic objectives, whether mediated by markets, online platforms, or organizations.