The Real Estate Portfolio of the United States House of Representatives
Ziobrowski, Alan J., McAlum, Harry, The Journal of Real Estate Research
This study examines the real estate investments of members of the United States House of Representatives from 1985 to 1995 with a focus on agency theory. The real estate holdings are characterized in terms of the number of properties owned, the reported value of the properties, property types, the property locations and transactions. Representatives are found to hold more real estate when compared to those of other investors in the United States with similar levels of income. Representatives also seem to time the market better, presumably because they understand more about the implications of the changes in tax laws they enacted. Thus, the Tax Reform Act of 1986 caused House members to reduce their real estate holdings much faster than other U.S. investors. This lower level of real estate investment may also have reduced the economic linkages between Representatives and their constituents, which might affect their incentive to fight for the interests of their constituents.
There can be little doubt that no asset class is more strongly influenced by federal tax policy than real estate. Together with the President of the United States and the United States Senate, no one has more influence on federal tax laws than do the 435 members of the United States House of Representatives. They also have a strong voice in the distribution of federal funding for such things as new interstate highways, military bases and large public works projects that, in turn, can have an immense impact on the economic well being of individual communities across the entire country. Therefore, members of the House not only affect real estate values on a macroeconomic scale but also impact real estate at the local level as well.
This research has strong ties to agency theory. Although agency theory has most commonly been applied to the management of the firm in the private sector, from the beginning Ross (1973) and Jensen and Meckling (1976) recognized that the principles of agency theory could be applied to the operation of government as well as the to operation of the firm. In a representative democracy, voters (the principals) correspond to the shareholders in a firm. Their role is to elect government officials and their objective is the maximization of net social benefits. Elected government officials (the agents), corresponding to corporate board members in the firm, represent the voters in the affairs of government collecting both explicit and implicit wages that affect both their behavior and their objectives. When working in government service, members of Congress earn low wages compared to what they could potentially earn in the private sector. As extra compensation, they earn additional wages in the form of the status and perquisites associated with their office and deferred compensation available from the private sector when they eventually leave office. However, to enhance their future career opportunities in the private sector or promote their re-election to Congress, they must minimize problems while in office. This conflict of interest between longterm objectives and their responsibilities to voters often causes them to publicly disavow the existence of serious problems, employ off-budget spending, accept secret campaign contributions and be overly influenced by special interest groups.
The use of agency theory to explain the behavior of government officials is perhaps best exemplified in studies related to the so-called "Savings and Loan Crisis" of the 1980s. Kane (1989, 1990, 1996) has been among the most prolific authors on this topic suggesting that agency costs were at the heart of the crisis. Kane argues that Congress failed to recognize structural weakness in the system of deposit insurance and regulation. Congress also failed to adequately monitor regulators and deposit insurers. Some people in Congress (most notably the "Keating Five") have even been charged with sacrificing the public good in order to satisfy the needs of special interest groups. …