The Economics of Tenancy Rent Control
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.
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