Buy Now or Keep Renting? A Modular Estimation Framework for Renter Decisions in the Rent-to-Own Business

Abstract

Problem definition: Rent-to-own (RTO) firms rent products in exchange for a periodic fee and offer the already-rented products for purchase at buyout prices to their renters. Prediction of buyout demand requires a decision model that accurately captures the renters' decision-making process and their ownership and rental utilities for a product, which together determine their willingness to pay buyout prices in different periods.

Methodology/results: We develop a new, modular framework that cleanly separates utility estimation from solving the renter's decision problem. We build several renter decision models, reflecting different degrees of sophistication in decision making (strategic, myopic, or one-step-look-ahead) and alertness to purchase offers. Analytically, we show that renters with higher utilities target earlier purchases to avoid abandonment of the rental without ownership because of their higher opportunity cost. We also show that renters who are more attentive (i.e., more likely to consider each buyout offer) target later purchases because of their higher continuation surplus. For each 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, using transaction data from an RTO firm, we compare the estimation performance of the different renter decision models and perform counterfactual analyses.

Managerial implications: Our framework and results illuminate the renter decision-making process, enabling improved demand prediction. The one-step-look-ahead model with limited alertness fits best to our data, suggesting respectively that the firm's renters have a short decision horizon and that they may neglect some buyout offers. Additionally, counterfactual analyses reveal the profit impact of alternative pricing policies and communication strategies. In particular, we find that relative to its current strategy, the firm should increase its mattress buyout prices and emphasize (downplay) the buyout offers to washer/dryer (mattress) renters.

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