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The Economics of Tenancy Rent Control

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  • Basu, Kaushik

    (Cornell U)

  • Emerson, Patrick M.

    (Cornell U)

Abstract

We consider a rent control regime where rent increases on, and eviction of, a sitting tenant are not allowed. However when an apartment becomes vacant the landlord is free to negotiate a new rent. Under such a regime, if inflation exists, landlords prefer to rent to short-staying tenants. Since departure-date-contingent contracts are forbidden and a landlord cannot tell whether a tenant is a short-stayer, an adverse selection problem arises. In this case, the equilibrium is Pareto inefficient. We show that when tenant types are determined endogenously, multiple equilibria can arise where one equilibrium is Pareto dominated by the other equilibrium. The abolition of the rent control regime, can not only shift the equilibrium out of this inferior outcome, but also result in an across-the-board lowering of rents.

Suggested Citation

  • Basu, Kaushik & Emerson, Patrick M., 2000. "The Economics of Tenancy Rent Control," Working Papers 00-04, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:00-04
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    References listed on IDEAS

    as
    1. Epple, Dennis, 1998. "Rent control with reputation: theory and evidence," Regional Science and Urban Economics, Elsevier, vol. 28(6), pages 679-710, November.
    2. Nagy, John, 1997. "Do Vacancy Decontrol Provisions Undo Rent Control?," Journal of Urban Economics, Elsevier, vol. 42(1), pages 64-78, July.
    3. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
    4. Nagy John, 1995. "Increased Duration and Sample Attrition in New York City's Rent Controlled Sector," Journal of Urban Economics, Elsevier, vol. 38(2), pages 127-137, September.
    5. Basu, Kaushik, 1989. "Technological Stagnation, Tenurial Laws, and Adverse Selection," American Economic Review, American Economic Association, vol. 79(1), pages 251-255, March.
    6. Ault Richard W. & Jackson John D. & Saba Richard P., 1994. "The Effect of Long-Term Rent Control on Tenant Mobility," Journal of Urban Economics, Elsevier, vol. 35(2), pages 140-158, March.
    7. Guasch, J. Luis & Marshall, Robert C., 1987. "A theoretical and empirical analysis of the length of residency discount in the rental housing market," Journal of Urban Economics, Elsevier, vol. 22(3), pages 291-311, November.
    8. Raymon, Neil, 1983. "Price ceilings in competitive markets with variable quality," Journal of Public Economics, Elsevier, vol. 22(2), pages 257-264, November.
    9. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
    10. 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.
    11. Hubert, Franz, 1995. "Contracting with costly tenants," Regional Science and Urban Economics, Elsevier, vol. 25(5), pages 631-654, October.
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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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