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Downward-Sloping Term Structure of Lease Rates: A Puzzle

Author

Listed:
  • Miki Seko

    (Faculty of Economics, Keio University)

  • Kazuto Sumita

    (Department of Economics, Kanazawa Seiryo University)

  • Jiro Yoshida

    (Smeal College of Business, The Pennsylvania State University)

Abstract

A model of the term structure of lease rates in a frictionless economy is developed and its predictions are compared with data on residential leases in Japan. The model shows that the initial lease rate for a cancellable lease must be set higher than that for a non-cancellable lease because the former rate will be repeatedly adjusted downward when the market rent decreases. More importantly, the term structure of lease rates is always upward-sloping for cancellable leases. Empirical findings show a sharp contrast with the theory. Fixed-term lease rates are often higher than open-ended long-term lease rates. Moreover, in the fixed-term lease sample, the term structure of lease rates is downward-sloping. The term structure is also heterogeneous by tenant's income.

Suggested Citation

  • Miki Seko & Kazuto Sumita & Jiro Yoshida, 2012. "Downward-Sloping Term Structure of Lease Rates: A Puzzle," Keio/Kyoto Joint Global COE Discussion Paper Series 2011-042, Keio/Kyoto Joint Global COE Program.
    • Handle: RePEc:kei:dpaper:2011-042
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
    • 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

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