Rent, Retrieve, Repeat until Sold: Demand Process Specification and Modular Estimation Framework for the Rent-to-Own Business

50 Pages Posted: 18 Feb 2023 Last revised: 16 Apr 2024

See all articles by Milad Armaghan

Milad Armaghan

University of Texas at Dallas - Naveen Jindal School of Management

M. Çakanyıldırım

University of Texas at Dallas - Naveen Jindal School of Management

Andrew Frazelle

University of Texas at Dallas - Naveen Jindal School of Management

Daniel Glasky

University of Texas at Dallas

Divakar Rajamani

University of Texas at Dallas

Date Written: February 15, 2023

Abstract

Rent-to-own (RTO) firms rent products for a periodic fee and provide a renter with the option to buy the product he is renting at specified buyout prices during the rental. Accurately capturing the renters' decision process as well as their ownership and rental utilities is required for determining their willingness to pay buyout prices in different periods. We develop a novel, modular framework that cleanly separates solving a renter's decision problem from estimating utility. We build several renter decision models spanning two dimensions: renter sophistication (from strategic to myopic) in decision making and renter alertness (alert or inert) to the buyout offers. Analytically, we show that strategic renters with higher utilities target earlier buyouts to avoid abandonment of the rental without ownership because of their higher opportunity cost. We also show that strategic renters that are more attentive (i.e., more likely to consider the buyout offer in each period) target later buyouts due to higher continuation surplus. Using transaction data from a prominent RTO firm for different products (washers, dryers and mattresses), for each decision model, we estimate a nonparametric utility distribution along with the probabilities of abandoning the rental, neglecting the buyout offer and considering the buyout offer. Finally, we compare the estimation performance of the decision models and perform counterfactual analyses. We find that the renters have a short decision horizon and frequently neglect the buyout offers. Also, their utilities remain stable throughout the rentals. Moreover, renters who opt for a rental agreement with a higher rental fee or a longer term tend to have higher ownership utility. Based on our counterfactual analyses, for washer or dryer renters, we suggest initiating efforts to increase the buyout consideration probability, e.g., through recurring notification of buyout offers. In contrast, for mattresses, whose renters more frequently consider buyout offers, we find that profits would be increased by setting prices higher.

Keywords: finite mixture model, strategic/myopic and alert/inert renter, dynamic structural estimation, likelihood

Suggested Citation

Armaghan, Milad and Cakanyildirim, Metin and Frazelle, Andrew and Glasky, Daniel and Rajamani, Divakar, Rent, Retrieve, Repeat until Sold: Demand Process Specification and Modular Estimation Framework for the Rent-to-Own Business (February 15, 2023). Available at SSRN: https://ssrn.com/abstract=4360629 or http://dx.doi.org/10.2139/ssrn.4360629

Milad Armaghan (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
2149953001 (Phone)

Metin Cakanyildirim

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Andrew Frazelle

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

HOME PAGE: http://andrewfrazelle.com

Daniel Glasky

University of Texas at Dallas

Divakar Rajamani

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

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