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Tenancy Default, Excess Demand and the Rental Market

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  • Katherine Cuff Nicolas Marceau

Abstract

We develop a model of a competitive rental housing market with an endogenous rate of tenancy default arising from income uncertainty. Potential tenants must choose to engage in a costly search for rental housing, and must commit to a rental agreement before the uncertainty is resolved. We show that there are two possible equilibria in this market: a market-clearing equilibrium and an equilibrium with excess demand. Therefore, individuals might not have access to rental housing because they are unable to afford to look for housing, they are unable to pay their rent, or with excess demand in the market they are simply unable to find a rental unit. We show that government regulations affecting the cost of default to the housing suppliers and the quality of rental units can have different effects on the equilibrium variables of interest — rental rate, quantity demanded and supplied, and access to rental housing — depending on the type of equilibria in the market. A numerical example illustrates these results.

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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2007-08.

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Length: 32 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:mcm:deptwp:2007-08

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Keywords: Tenancy Default; Excess Demand; Rental Housing Policies;

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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. John M. Quigley & Steven Raphael, 2004. "Is Housing Unaffordable? Why Isn't It More Affordable?," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 191-214, Winter.
  3. Kaushik Basu & Patrick M. Emerson, 2003. "Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords," Economica, London School of Economics and Political Science, vol. 70(278), pages 223-232, 05.
  4. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
  5. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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