The Division of Labour in Service Industries: Evidence from the Residential Real Estate Industry

In settings where firms are human-capital constrained, such as service industries, the division of labor among firms may be beneficial because it allows firms to focus their limited resources on a subset of complementary activities, increasing productivity. However, when firms divide labor, they share value with the industry complementors, incurring the costs of forgoing a portion of the value created by the complementary activities. 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 cost of sharing the value created with the industry complementors. I advance the notion that demand characteristics interact with firms’ resources, exerting a stronger influence on the most productive firms. Overall, this paper develops the scholarly understanding of factors influencing the division of labor among firms. Prior work has suggested that the most productive firms should integrate over the provision of 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.