Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords

20 Pages Posted: 16 Nov 2001

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Patrick Munro Emerson

Independent

Date Written: October 2001

Abstract

We consider a model of 'tenancy rent control' where landlords are not allowed to raise the rent on sitting tenants nor to evict them, though they are free to set the nominal rent when taking on a new tenant. If there is any inflation in the economy, landlords prefer to take short-staying tenants. Assuming that there is no way for landlords to tell a tenant's type, an adverse selection problem arises. If in this context, landlords have monopoly power-which, as we argue, is indeed pervasive-then the housing market equilibria can exhibit some unexpected properties. Most strikingly, landlords may prefer not to raise the rent even when there is excess demand for housing. Such rents are labeled "efficiency rents" in this paper and their existence shows that tenancy rent control can give rise to equilibria that look as if there were traditional rent control in which the rent of each unit has a flat ceiling. In other words, tenancy rent control may not achieve the flexibility, which it was expected to impart, to the system of traditional rent control.

Keywords: Rent Control, Rent Regulation, Asymmetric Information, Adverse Selection, Monopoly.

JEL Classification: D40, K10, L12, L51, R31

Suggested Citation

Basu, Kaushik and Emerson, Patrick Munro, Efficiency Pricing, Tenancy Rent Control and Monopolistic Landlords (October 2001). Available at SSRN: https://ssrn.com/abstract=290831 or http://dx.doi.org/10.2139/ssrn.290831

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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IZA Institute of Labor Economics

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Brookings Institution ( email )

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Washington, DC 20036
United States

Patrick Munro Emerson

Independent

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