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Equilibrium Excess Demand in the Low Income Rental Housing Market: Theory and Experimental Evidence

Author

Listed:
  • Katherine Cuff
  • Nicolas Marceau
  • Reyhaneh Nikoonejad
  • Bradley Ruffle

Abstract

We develop a model of monopolistic competition in the rental housing market for low-income households with endogenous tenancy default. Identical suppliers choose the number of rental units to supply and the rental price to charge to maximize expected profits. Potential tenants who differ in their incomes and face an uninsurable income risk choose whether to engage in a costly search for rental housing. If they search and find a rental unit, then they must commit to a rental agreement before their income uncertainty is resolved. Consequently, some tenants may default on their rental payments. We show that tenancy default can explain persistent excess demand in the low-income rental housing market without any government price regulations, and that such excess demand can lead to nonstandard effects of government regulations. We also test whether the excess-demand equilibrium is behaviorally plausible by designing a laboratory experiment. Our experimental results reveal that, with feedback and repetition, the excess-demand equilibrium that requires landlord participants to restrict supply is no more difficult for participants to reach than a market-clearing equilibrium.

Suggested Citation

  • Katherine Cuff & Nicolas Marceau & Reyhaneh Nikoonejad & Bradley Ruffle, 2026. "Equilibrium Excess Demand in the Low Income Rental Housing Market: Theory and Experimental Evidence," CESifo Working Paper Series 12808, CESifo.
    • Handle: RePEc:ces:ceswps:_12808
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    Keywords

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    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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