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Excessive Rents and Non-Compliance with Price Ceilings

Author

Listed:
  • Christos Constantatos

    (University of Macedonia)

Abstract

Standard microeconomic theory warns us that price controls create incentives for non compliance. In this paper we analyze the suppliers' compliance with price ceilings decisions in a competitive sector, focusing on rent controls. We conclude that, first, forcing a non-complying landlord to simply return all payments in excess of the maximum allowed amount constitutes an implicit, nevertheless effective, real penalty. Second, instead of bringing the price back to its free market level, black market results to some implicitly defined ceiling, above the legal one. Third, as the gap between the ceiling and the free market price increases, the efficiency of fixed fines relative to that of proportional fines is reduced.

Suggested Citation

  • Christos Constantatos, 2007. "Excessive Rents and Non-Compliance with Price Ceilings," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 5(2), pages 225-231.
  • Handle: RePEc:seb:journl:v:5:y:2007:i:2:p:225-231
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    File URL: http://www.asecu.gr/Seeje/issue09/constantatos.pdf
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    References listed on IDEAS

    as
    1. Grenier, Gilles, 1982. "On Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 184-187, February.
    2. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    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. Yongmin Chen & Robert W. Rosenthal, 1996. "On the Use of Ceiling-Price Commitments by Monopolists," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 207-220, Summer.
    5. Lee, Dwight R, 1978. "Price Controls, Binding Constraints, and Intertemporal Economic Decision Making," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 293-301, April.
    6. Ashenfelter, Orley & Smith, Robert S, 1979. "Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 333-350, April.
    7. 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, May.
    8. Thies, Clifford F, 1993. "Rent Control with Rationing by Search Costs: A Note," The Journal of Real Estate Finance and Economics, Springer, vol. 7(2), pages 159-165, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Price ceiling; compliance; demand elasticity; penalty schemes;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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