An Economic Model of Asymmetric Information, Dissatisfaction, and Resident Turnover in Rented Multifamily Housing

Abstract

This paper presents an original economic model of the apartment rental market where service expenditures are invisible to prospective residents (but highly important to current residents), while recruiting expenditures are highly visible to prospective residents (but often inconsequential to current residents). In a competitive market, the model predicts that managers will necessarily favor observable recruiting expenditures, even though such an approach generates greater resident dissatisfaction and turnover, while simultaneously increasing operational costs for the industry as a whole. Evidence drawn from both the 2005 American Housing Survey and the operational expenses of 705,178 unsubsidized apartment units in 71 metropolitan areas appears consistent with the model. Consumer advocacy and legislative approaches to addressing the issue of asymmetric information among prospective residents are discussed, including a proposal of tax incentives for long-term residency.

Keywords: residential satisfaction, assymetric information, game theory

JEL Classification: R21