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Tenancy Default, Excess Demand and the Rental Market

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  • Katherine Cuff Nicolas Marceau

Abstract

We develop a model of a competitive rental housing market with an endogenous rate of tenancy default arising from income uncertainty. Potential tenants must choose to engage in a costly search for rental housing, and must commit to a rental agreement before the uncertainty is resolved. We show that there are two possible equilibria in this market: a market-clearing equilibrium and an equilibrium with excess demand. Therefore, individuals might not have access to rental housing because they are unable to afford to look for housing, they are unable to pay their rent, or with excess demand in the market they are simply unable to find a rental unit. We show that government regulations affecting the cost of default to the housing suppliers and the quality of rental units can have different effects on the equilibrium variables of interest — rental rate, quantity demanded and supplied, and access to rental housing — depending on the type of equilibria in the market. A numerical example illustrates these results.

Suggested Citation

  • Katherine Cuff Nicolas Marceau, 2007. "Tenancy Default, Excess Demand and the Rental Market," Department of Economics Working Papers 2007-08, McMaster University.
  • Handle: RePEc:mcm:deptwp:2007-08
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2007-08.pdf
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    References listed on IDEAS

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    1. Chester Hartman & David Robinson, 2003. "Evictions: The hidden housing problem," Housing Policy Debate, Taylor & Francis Journals, vol. 14(4), pages 461-501, January.
    2. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    3. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
    4. Kaushik Basu & Patrick M. Emerson, 2003. "Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords," Economica, London School of Economics and Political Science, vol. 70(278), pages 223-232, May.
    5. 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.
    6. John M. Quigley & Steven Raphael, 2004. "Is Housing Unaffordable? Why Isn't It More Affordable?," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 191-214, Winter.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Tenancy Default; Excess Demand; Rental Housing Policies;

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition

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