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Sticky Rents: A Simple Implicit-Contracts Theory

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Abstract

Shelter inflation, driven by continuing-tenant rents, accounts for one-third of the consumer price index (CPI). Yet continuing-tenant rent inflation, notoriously sticky, has attracted almost no theoretical attention. Standard sticky price theories cannot explain the basic facts. We provide a simple theory yielding implicit contracts as an equilibrium. The landlord will wish to renege when costs rise; reputation is unavailable to enforce the contract. A well-established mechanism serves: landlord off-equilibrium-path play might result in renter frustration and endogenous breakup. Our implicit-contracts theory gracefully explains nominal (rather than real) rigidity, and provides a microfounded explanation of key rental market facts.

Suggested Citation

  • Hugh Montag & Randal J. Verbrugge, 2026. "Sticky Rents: A Simple Implicit-Contracts Theory," Working Papers 26-12, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:103313
    DOI: 10.26509/frbc-wp-202612
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    1. Randal Verbrugge & Alan Dorfman & William Johnson & Fred Marsh III & Robert Poole & Owen Shoemaker, 2017. "Determinants of Differential Rent Changes: Mean Reversion versus the Usual Suspects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(3), pages 591-627, July.
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    Keywords

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    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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