Rent Control Revisited: Effects On The Principal Agent Problem In Property Management

Rent control laws in the U.S. and many European countries purport to offer two benefits: a) provide housing similar to other commodities in a plentiful and cheap way; b) reduce effects of inflation on housing prices. Both objectives have in common the goal of providing affordable housing for the less fortunate in society. Economic as well as social effects of the introduction of rent control have since then been a source of heated discussions, in the public as well as in academia. However, there is a gap in the literature regarding the effect of rent control on property management. Any property owner faces the choice of self-managing property ñ hence incurring costs in form of time spent on management that could be spent otherwise (opportunity cost) ñ or retaining a third party manager. The latter case creates the well-known principal-agent problem, where the owner (the principal) hands responsibilities for her property to the manager (the agent). Although both are interested in utility maximization, the route to accomplishing these goal can differ considerably, often resulting in sub-optimal management and returns for the principal. There is some belief that the principal agent problem can be managed through the introduction of appropriate incentive structures. Building upon previously published work by the authors that developed models for the optimization of property management and the management of the agency problem, this paper investigates the additional effects of rent control. It is shown that optimization of income for the owner, or principal, can only be achieved if management is reduced and eventually eliminated entirely. An unanticipated consequence of rent control therefore is the deterioration of the housing stock, notwithstanding minimum habitability standards imposed by regulators. This dilemma argues against dropping management entirely and interferes with the ownerís quest to find the right incentive structure for his agent.