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A Theory of Sticky Rents: Search and Bargaining with Incomplete Information

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Abstract

The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants? rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in the absence of menu costs or other commonly used modeling assumptions. Tenants? valuations of their units, and whether they are considering other units, are both private information. At lease end, the behavior of risk-averse landlords differs according to the number of units managed. Multi-unit landlords, aided by the law of large numbers, exploit tenant moving costs. When renegotiating rent contracts, they set rent increases that exceed the inflation rate; while the majority of tenants stay, those who place low value on the unit search elsewhere and leave. Landlords with one unit loathe vacancy and offer tenants the identical contract to pre-empt search; only those who really hate the unit leave.

Suggested Citation

  • Joshua H. Gallin & Randal J. Verbrugge, 2017. "A Theory of Sticky Rents: Search and Bargaining with Incomplete Information," Working Papers (Old Series) 1705, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1705
    DOI: 10.26509/frbc-wp-201705
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    Cited by:

    1. Adams, Brian & Verbrugge, Randal, 2025. "Location, location, structure type: Rent divergence within neighborhoods," Journal of Housing Economics, Elsevier, vol. 69(C).
    2. Dean, Jason & Steele, Marion, 2022. "Income decline, financial insecurity, landlord screening and renter mobility," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    3. David Gstrein & Florian Neumeier & Andreas Peichl & Pascal Zamorski, 2025. "Capitalists, Workers and Landlords: A Comprehensive Analysis of Corporate Tax Incidence," RFBerlin Discussion Paper Series 25143, ROCKWOOL Foundation Berlin (RFBerlin).
    4. Leo Reutter, 2025. "Inefficient incentives for energy saving in tenancy law and policy options to remedy the landlord-tenant dilemma," European Journal of Law and Economics, Springer, vol. 59(1), pages 179-218, February.
    5. Wang, Haoyu, 2020. "Stickiness of rental rate and housing vacancy rate," Economics Letters, Elsevier, vol. 195(C).
    6. Randal Verbrugge & Saeed Zaman, 2024. "Post‐COVID inflation dynamics: Higher for longer," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(4), pages 871-893, July.
    7. Lara Loewenstein & Jason Meyer & Randal J. Verbrugge, 2024. "New-Tenant Rent Passthrough and the Future of Rent Inflation," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2024(17), pages 1-10, October.
    8. Suzuki, Masatomo & Asami, Yasushi & Shimizu, Chihiro, 2021. "Housing rent rigidity under downward pressure: Unit-level longitudinal evidence from Tokyo," Journal of Housing Economics, Elsevier, vol. 52(C).
    9. McCarthy, Barra, 2024. "Institutional Investment and Residential Rental Market Dynamics," Research Technical Papers 1/RT/24, Central Bank of Ireland.
    10. Carlos Garriga & Athena Tsouderou & Pedro Gete, 2019. "Housing Dynamics without Homeowners. The Role of I," 2019 Meeting Papers 1407, Society for Economic Dynamics.
    11. Kren, Janez & Slaymaker, Rachel, 2025. "Landlord size, rent controls and rent pricing behaviour: Evidence from Ireland," Papers WP814, Economic and Social Research Institute (ESRI).
    12. Dias, Daniel A. & Duarte, João B., 2015. "Monetary Policy and Homeownership: Empirical Evidence, Theory, and Policy Implications," MPRA Paper 112252, University Library of Munich, Germany, revised 05 Mar 2021.
    13. Gamber, William & Graham, James & Yadav, Anirudh, 2023. "Stuck at home: Housing demand during the COVID-19 pandemic," Journal of Housing Economics, Elsevier, vol. 59(PB).
    14. Shin, Wonmun, 2022. "A New angle on excess consumption volatility in emerging countries: Does house price matter?," Journal of International Money and Finance, Elsevier, vol. 124(C).

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    Keywords

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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • 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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