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The economic and law of rent control

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  • Basu, Kaushik
  • Emerson, Patrick

Abstract

The authors construct a model of second-generation rent control, describing a regime that does not permit rent increases for sitting tenants--or their eviction. When an apartment becomes vacant, however, the landlord is free to negotiate a new contract with a higher rent. They argue that this stylized system is a good (though polar) approximation of rent control regimes that exist in many cities in India, the United States, and elsewhere. Under such a regime, if inflation exists, landlords prefer to rent to tenants who plan to stay only a short time. The authors assume that there are different types of tenants (where"type"refers to the amount of time tenants stay in an apartment) and that landlords are unable to determine types before they rent to a tenant. Contracts contingent on departure date are forbidden, so a problem of adverse selection arises. Short stayers are harmed by rent control while long-term tenants benefit. In addition, the equilibrium is Pareto inefficient. The authors show that when tenant types are determined endogenously (when a tenant decides how long to stay in one place based on market signals) in the presence of rent control, there may be multiple equilibria, with one equilibrium Pareto-dominated by another. In other words, many lifestyle choices are made based on conditions in the rental housing market. One thing rent control may do is decrease the mobility of the labor force, because tenants may choose to remain in a city where they occupy rent-controlled apartments rather than accept a higher-paying job in another city. The authors show that abolishing the rent control regime can do two things: shift the equilibrium to a better outcome and result in lower rents, across the board.

Suggested Citation

  • Basu, Kaushik & Emerson, Patrick, 1998. "The economic and law of rent control," Policy Research Working Paper Series 1968, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1968
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    References listed on IDEAS

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    1. Raymon, Neil, 1983. "Price ceilings in competitive markets with variable quality," Journal of Public Economics, Elsevier, vol. 22(2), pages 257-264, November.
    2. Richard Arnott, 1997. "Rent Control," Boston College Working Papers in Economics 391., Boston College Department of Economics.
    3. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
    4. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
    5. Hubert, Franz, 1995. "Contracting with costly tenants," Regional Science and Urban Economics, Elsevier, vol. 25(5), pages 631-654, October.
    6. Mark Frankena, 1975. "Alternative Models of Rent Control," Urban Studies, Urban Studies Journal Limited, vol. 12(3), pages 303-308, October.
    7. Basu, Kaushik, 1989. "Technological Stagnation, Tenurial Laws, and Adverse Selection," American Economic Review, American Economic Association, vol. 79(1), pages 251-255, March.
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    9. Sweeney, James L, 1974. "Quality, Commodity Hierarchies, and Housing Markets," Econometrica, Econometric Society, vol. 42(1), pages 147-167, January.
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    Cited by:

    1. Ballesteros, Marife M., 2001. "Benefits (and Losses) From Rent Control in the Philippines: An Empirical Study of Metro Manila," Discussion Papers DP 2001-23, Philippine Institute for Development Studies.

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