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Rent Control and Tenants' Welfare: The Effects of Deregulating Rental Markets in Finland

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  • Teemu Lyytikäinen

Abstract

Private rental markets in Finland were subject to rent control from 1967 until the beginning of the 1990s when the rent control system was gradually abolished. This study estimates the costs and benefits of rent control to tenants in private rental dwellings in 1990 using the years 1998 and 2001 as benchmarks. Special emphasis is placed on the welfare costs of increased discrepancies between actual and desired housing consumption due to the overdemand situation caused by rent control. Earlier studies on the welfare effects of rent control usually assume that the household would consume on the estimated demand curve in the absence of rent control. Here it is shown that this assumption biases estimates of the net benefit of rent control to tenants downwards and welfare measures are derived that also allow for suboptimal housing consumption in the absence of rent control. The empirical implementation of these measures utilizes micro-simulation to differentiate between ?natural? free market disequilibrium costs and additional disequilibrium costs caused by rent control. According to the results, the additional disequilibrium costs offset roughly 30 per cent of the benefits of lower rents to tenants and amounted to over 2 per cent of consumption expenditure of tenant households. The estimated net benefit of rent control to tenants, taking both low rents and disequilibrium costs into account, was 4.5 or 6.5 per cent of consumption expenditure, depending on the reference year. The ratio of the net benefit to tenants to the costs of lower rents to landlords was 64 or 72 per cent.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 385.

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Date of creation: 21 Mar 2006
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Handle: RePEc:fer:dpaper:385

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Keywords: Rent control; consumer?s surplus; disequilibrium costs;

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  1. Jeroen Weesie, 1998. "Regression analysis with multiplicative heteroscedasticity," Stata Technical Bulletin, StataCorp LP, vol. 7(42).
  2. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-97, September.
  3. Edward L. Glaeser & Erzo F. P. Luttmer, 2003. "The Misallocation of Housing Under Rent Control," American Economic Review, American Economic Association, vol. 93(4), pages 1027-1046, September.
  4. Olsen, Edgar O, 1972. "An Econometric Analysis of Rent Control," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1081-1100, Nov.-Dec..
  5. Harvey, A C, 1976. "Estimating Regression Models with Multiplicative Heteroscedasticity," Econometrica, Econometric Society, vol. 44(3), pages 461-65, May.
  6. Early, Dirk W., 2000. "Rent Control, Rental Housing Supply, and the Distribution of Tenant Benefits," Journal of Urban Economics, Elsevier, vol. 48(2), pages 185-204, September.
  7. Malpezzi, Stephen, 1998. "Welfare analysis of rent control with side payments: a natural experiment in Cairo, Egypt1," Regional Science and Urban Economics, Elsevier, vol. 28(6), pages 773-795, November.
  8. Zabel, Jeffrey E., 2004. "The demand for housing services," Journal of Housing Economics, Elsevier, vol. 13(1), pages 16-35, March.
  9. Olsen, Edgar O., 1987. "The demand and supply of housing service: A critical survey of the empirical literature," Handbook of Regional and Urban Economics, in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 25, pages 989-1022 Elsevier.
  10. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
  11. Edin, Per-Anders & Englund, Peter, 1991. "Moving costs and housing demand : Are recent movers really in equilibrium?," Journal of Public Economics, Elsevier, vol. 44(3), pages 299-320, April.
  12. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
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Cited by:
  1. Juan S. Mora, 2008. "The institutions of house tenancy markets in post-war Western Europe: an economic analysis," Working Papers in Economic History wp08-11, Universidad Carlos III, Departamento de Historia Económica e Instituciones.

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