The Division of Labor in Service Settings: Evidence from Residential Real Estate Brokerages

In this paper, I argue that demand characteristics such as market size and the variance of consumers’ valuations impact the costs and benefits of division of labor in service industries. I posit that market size increases the benefits of the division of labor, while the variance of consumers’ valuations increases the costs of dividing value with the industry complementors. Additionally, I advance the notion that demand characteristics exert a stronger influence on the most productive firms. Prior work has suggested that the most productive firms should integrate complementary activities to increase the value created by the system. In this study, I show that the most productive firms prefer to integrate when the variance of consumer valuations increases; however, the most productive firms are also more likely to specialize as market size increases. I find empirical support to the theory using a large proprietary dataset covering real estate transactions in the Southeast Michigan.