The Economics and Law of Rent Control

We consider a rent control regime where rent increases on, and eviction of, a sitting tenant are not allowed. However when an apartment becomes vacant the landlord is free to negotiate a new rent. We argue that this stylized system is a good (though polar) approximation for many rent control regimes existent today in several U.S. cities and the world over. Under such a regime, if inflation exists, landlords prefer to rent to short-staying tenants. Tenants are of different types, where type refers to the amount of time they stay in an apartment, and landlords are unable to determine types before they rent to tenants. Since departure date contingent contracts are forbidden, an adverse selection problem arises. In this case, short-stayers are harmed by rent control while long-stayers benefit and landlord’s profits remain the same, and, in addition, the equilibrium is Pareto inefficient. We show that when tenant types are determined endogenously, then in the presence of rent control there may be multiple equilibria where one equilibrium is Pareto dominated by another equilibrium. The abolition of the rent control regime, can not only shift the equilibrium out of this inferior outcome, but can also result in an across-the-board lowering of rents. (JEL classification numbers: D40, K10, L51, R31) Acknowledgments: The authors have benefited from a presentation of this paper at the Applied Microeconomics Workshop at Cornell University. For comments and discussion, we would like to thank Pinaki Bose, Robert Masson and Ted O’Donoghue.