Advertising and Natural Vacancies in Rental Housing Markets

We formulate a model that explains vacancy durations arising from lags in matches between the suppliers and demanders of housing units. We emphasize rental housing markets in this exposition although the model could be extended to competitive or noncompetitive rental or home-ownership markets. In the case of rental markets, if tenants do not immediately inform landlords upon initiating search for a new unit, landlords are delayed in their search for a new tenant. These matching delays induce a positive natural vacancy rate that cannot be reduced to zero, even in competitive markets. Price-taking landlords are, however, able to affect the resulting vacancy duration through advertising in a Cournot-Nash equilibrium and will, in general, invest in inefficient levels of advertising. As a consequence, there may be a role for public policy to provide incentives that would induce noncooperative landlords to choose the vacancy cost-minimizing advertising solution.     

Maintenance, Housing Quality, and Vacancies under Imperfect Information

A model of a rental housing market is presented in which landlords economize on the maintenance of housing quality to profit from tenants imperfect information. In a partial equilibrium model that describes tenants by their distribution of minimum acceptable (reservation) quality for units priced at an identical rent, these profits induce entry of new units, resulting in rental vacancies. The equilibrium number of landlords and the market vacancy rate are derived in a free entry, imperfect information equilibrium in which the distribution of rental unit qualities range from the competitive quality to that which would be offered by a monopoly landlord.     

Security Deposits, Adverse Selection and Office Leases

Our focus in this article is on the extent to which security deposits allow landlords to contract on the intensity with which tenants utilize office space. Much existing discussion recognizes that landlords expect some tenants to be more opportunistic than others, but that landlords often cannot predict a tenant's future behavior. As a consequence, landlords will charge all tenants, both low-utilization and high-utilization ones, a rental externality premium. This rental externality premium gives low-utilization tenants (or tenants with better credit quality than the market perceives) a strong incentive to sort themselves out. Our findings suggest that office rental contracts with large up-front security deposits are one way in which different tenant types can sort themselves out. Such contracts reduce landlord uncertainty and imply rental discounts in excess of the foregone interest on the deposit monies.     

A Note on Inflation and Relative Tenure Prices

This article develops a simplified model of housing costs to analyze the effects of the expected rate of inflation on residential tenure choice. Inflation, working though the Federal Tax Code, affects a number of the components of housing costs in ways which vary between tenure modes. On net, the tax subsidy to owner-occupancy is more positively leveraged with respect to expected inflation than are tax preferences for rental residential real estate. In fact, it is likely that higher expectations of inflation will reduce the after-tax cost of owner-occupied housing.     

Housing Rental Contracts and Adverse Selection with an Application to the Rent-Own Decision

A model of rental housing is developed in which landlords cannot observe the utilization rate of their tenants. As a result of this imperfect information, an adverse selection problem exists where high utilization households have an incentive to conceal their type in order to obtain more favorable contract terms. Consequently, the market equilibrium must satisfy a self-selection constraint, which imposes certain restrictions on the set of contracts that will be offered by landlords. These restrictions are examined in detail, and their implications for a household's decision to rent or own its housing are derived.     

Finnish Homes—Through Passages or Traps?

This is a study of tenure choice, housing demand and mobility in the submarkets of the Helsinki metropolitan area. The empirical analysis is based on data on households, type of tenure, housing characteristics and mobility for a sample of Helsinki residents at the end of 1980s. According to our results the probability of owning is affected not only by user costs of alternative tenure forms but also by permanent income and demographic variables. Results from the tenure specific housing demand models indicate that there are non-neutralities in the housing markets. Permanent income elasticities of housing demand are clearly positive in owner-occupied sector and systematically higher than in the rented sector. The demand for owner-occupied housing depends very strongly on the age of the household head. User cost per housing unit affects housing demand negatively in both tenure forms. Effective demand is greater in private housing sector. The results suggest that owner-occupied living is preferred with heavily subsidized households the least likely to move. In the rental sector, where the probability of moving is higher, it is also true that the most heavily subsidized households are the least likely to move.     

What Do Rental Contracts Reveal About Adverse Selection and Moral Hazard in Rental Housing Markets?

This article examines the pricing of rental contracts for two types of renter households: those who are able to amass a large, up-front security deposit and those with little, or no, security to offer. Empirical tests are presented to suggest that, in dealing with renter households who have little, or no, security to offer, landlords earn at a similar rate of return as lenders who make riskier loans at a high interest rate to borrowers of dubious credit. The analysis suggests that this situation occurs in large part because of the problem of asymmetric information and moral hazard between landlords and renter households regarding the latter's use of the premises.     

Rental markets,gender, and land certificates: Evidence from Vietnam

In developing countries, a significant share of land transactions occurs among closely related parties and often does not entail any specific compensation (in-kind or monetary). Despite the prevalence of these non-market or informal transactions, the literature has paid little attention to the determinants and consequences of these exchanges. In this paper we shed light on the role land use certificates play on the agreed compensation of rental agreements when landlords, particularly those with weaker ex-ante tenure security (i.e. women), rent out land to their relatives in Viet Nam. We find that female-headed households who lease their plots to relatives are less likely to receive any type of payment, unless they possess a title for the plot they leased. A regional decomposition of our results shows that this effect is more predominant in the Northern regions.     

A behavioral theory of governments’ ability to make credible commitments to firms: The case of the East Asian paradox

An expansive literature exists linking institutional constraints, credible commitments, and economic growth. Yet, this literature runs into difficulty when it tries to explain the East Asian “paradox:” rapid economic growth achieved by countries with low levels of formal constraints on government discretion. We use a behavioral theory of commitment to argue that the characteristics of the salient actors (governments) and their actions (policies) affect the credibility of their behaviors in ways independent of the structural underpinnings of a country’s political institutions. This behavioral theory of commitment provides a distinct but complementary lens through which to view the apparent paradox presented by these East Asian countries, and more generally provides an alternative theoretical mechanism to explain and predict governments’ ability to credibly signal their commitment to a course of action to investing firms. The success of East Asian countries in encouraging investment from both domestic and foreign firms implies that firms interpret governments’ actions as credible signals of their intention to honor their commitments to firms, consistent with the behavioral theory of commitment.     

On the Value of Environmental Certification in the Commercial Real Estate Market

A significant part of the global carbon externality stems from the real estate sector. Environmental certification is often hailed as an effective means to resolve the information asymmetry that may prevent markets from effectively pricing the energy performance of buildings. This study analyzes the adoption and financial outcomes of environmentally certified commercial real estate over time. We document that nearly 40% of space in the 30 largest U.S. commercial real estate markets holds some kind of environmental certification in 2014, as compared to less than 5% in 2005. Tracking the rental growth of 26,212 office buildings, we measure the performance of environmentally certified real estate over time. We document that certified office buildings, on average, have slightly higher rental, occupancy and pricing levels, but do not outperform non‐certified buildings in rental growth over the 2004–2013 period. Further performance attribution analysis indicates that local climate conditions, local energy prices and the extent of certification lead to significant heterogeneity in market pricing. On aggregate, these findings provide some evidence on the efficiency of the market in the adoption and capitalization of environmental characteristics in the commercial real estate market.     

The hidden cost of smoking: Rent premia in the housing market

In this article, we provide novel evidence on the additional costs associated with smoking. While it may not be surprising that smokers pay a rent premium, we are the first to quantify the size of this premium. Our approach is innovative in that we use text mining methods that extract implicit information on landlords’ attitudes to smoking directly from Zoopla UK rental listings. Applying hedonic, matching, and machine-learning methods to the text-mined data, we find a positive smoking rent premium of around 6%. This translates into £14.40 of indirect costs, in addition to £40 of weekly spending on cigarettes estimated for an average smoker in the United Kingdom.     

Another Look at Tenure Choice, Inflation, and Taxes

The purpose of this paper is to explore the impact of inflation on the demand for housing. The first part of the paper presents a theoretical model that identifies the effects of inflation on the after-tax cost of housing and the choice between rental and owner-occupied housing. The second part discusses the results of a simulation model that measures the effect of inflation on the aggregate demand for housing, the aggregate homeownership rate, and the price of housing. The paper concludes that while inflation can be expected to increase the aggregate demand for housing and the price of housing relative to the general price level, inflation should ultimately lead to lower rates of homeownership. A corollary that is probably more relevant today is that lower inflation rates should reduce the real value of the housing stock and increase the homeownership rate. The paper also contains forecasts of the impact of the Tax Reform Act (TRA) of 1986 upon housing demand and the probability of homeownership for a variety of households.     

Commercial Real Estate Rental Index: A Dynamic Panel Data Model Estimation

Using the actual quarterly rental income generated in the years between 2001 and 2010 by over 9,000 NCREIF commercial properties, we construct a commercial real estate rental index and estimate the time series properties (e.g., mean‐reversion speed and volatility) of market‐wide rental growth using a dynamic panel data model. The dynamic panel data model has several advantages over a standard hedonic regression. In addition, we incorporate age effects into our panel data model, and by doing so we correct the age bias in the repeated sales method and in the simple average method. Our estimates show that rental growth is cyclical but it generally lags behind broader economic growth. Surprisingly, the long‐term average rental growth is significantly lower than what is usually perceived, and the volatility of rental growth can be significantly under estimated when the conventional methods are adopted. We also find significant cross‐property type and cross‐region variations in the rental adjustment process. In contrast to the existing literature, we find a strong negative relation between rental growth and cap rate, and that this relation is significantly stronger than that between NOI growth and cap rate. Finally, we establish an empirical relation between price return and rental growth in the commercial real estate market.     

Multifamily Distress: A Case for National Action*

Among other reasons, controlling financial distress in the conventional multifamily sector is important because of the neighborhood destabilizing effects of partially occupied and vacant buildings and the potential lending cutbacks that could be made by financial intermediaries whose loan portfolios may contain substantial numbers of older, failing rental properties. This article develops the case for a heightened national concern for the importance of this inventory to the housing welfare of the nation, particularly lower income and minorities; and then by analyzing the known levels of distress in the FHA insured unsubsidized stock. Failure rates in this portion of the multifamily sector are sufficiently great to suggest that similar problems already plague the conventional market and that such distress should be of major policy interest. The final section propose the development of a multifamily research and demonstration program as a basis for national action.     

When Things Go Wrong,Don't Rely on Committed Consumers: Effects of Delayed Product Launches on Brand Trust

Consumers understand product preannouncements as credible promises to bring innovations to market at a given time. However, a majority of preannounced products are introduced with some delay. This study investigates potential loss in brand trust due to delay and the role of brand commitment in this process. Building on the Commitment‐Trust Theory of Relationship Marketing, which posits trust as a crucial antecedent of the commitment construct, this study extends this common perspective and proposes an additional reversal path from commitment to trust. That is, in the case of a delayed launch, the more stable commitment should buffer a loss in brand trust, which is more fragile. In three studies, this research finds consistent evidence that consumers lose trust in brands as a result of delayed launches. Surprisingly, high brand commitment does not mitigate such losses. In contrast, a long‐term relationship with a launching brand proves to be a buffer against losses in brand trust. Different operationalizations of brand commitment in laboratory and field experiments with brands from different product categories contribute to the generalizabilty of this work's findings.     

Product Durability and Moral Hazard

Previous durability studies conclude that a monopolist that sells output without any commitment ability will tend to produce output with lower durability than a monopolist that rents output. This paper demonstrates that this conclusion depends critically on the degree of moral hazard (possible damage to output) faced by renting firms. When moral hazard abuse or neglect is introduced in a durability model it is shown that a renter may manufacture output with lower durability than an uncommitted seller reversing the conventional obsolescence result. However, the analysis indicates that, unlike the seller's commitment problem, the presence of moral hazard in rental markets does not cause a failure of the independence of durability and industry structure.     

Pharmaceutical innovation and parallel trade

This paper proposes a North–South model to study the interaction between price regulation policies and parallel trade, with a particular focus on the pharmaceutical sector. We show that, under parallel trade, R&D investment can rise only when the South government takes into full account its impact both on investment and on the firm's decision to supply the regulated country. This arises because of a complete withdrawal from price regulation. When policy choices are endogenized, indeed the South wants to achieve this level of full commitment when it is large in size. When instead it is smaller in size, the South chooses an intermediate form of commitment whereby it anticipates its effect only on local distribution and delivery, but not on global R&D investment. As a response to these credible levels of price control commitments, the North reacts by allowing parallel imports from the South.     

An Evaluation of Hedonic Price Indexes for Thirty-four Large SMSAs

The purpose of this paper is twofold. First, a set of price indexes are developed for thirty-four metropolitan areas for the years 1975 and 1978. Indexes are also broken down by central city and suburb for twenty two of the metropolitan areas. These indexes measure variation in the price per unit of owner-occupied housing stock and the price per unit of housing services of rental housing. Confidence intervals are constructed for the price indexes. It is found that the indexes are reasonably precise measures in that the typical ratio of the confidence interval to the predicted median rent or value is about 13%. Also, analysis of the confidence intervals indicates substantial and statistically significant variation in the price of housing stock and services among the metropolitan areas studied. One of the major benefits of this set of indexes is that it can be used to address one of the most important questions in real estate — Why do housing prices and rents vary among metropolitan areas and over time? Research projects are currently underway that use the data to address these two questions.     

Adjustment in Property Space Markets: Taking Long-Term Leases and Transaction Costs Seriously

Markets for property space adjust only gradually because tenants and landlords are constrained by long-term leases and transaction and information costs. Not only do rents adjust slowly, but space occupancy, which depends on historical rents, often differs from demand at current rent. This creates "hidden vacancies," vacancies that will develop in the future if market rent and the space demand driver are unchanged. That is, if current rent is greater/lesser than average rent, then hidden vacancies are positive/negative. Moreover, because of hidden vacancies, open vacancies and rent are not mirror images of each other. Thus it is necessary to estimate both rental and vacancy rate adjustment processes. We do this using annual data for Stockholm offices during the 1977–2002 period and simulate the response of rent and vacancies (open and hidden) to an employment shock.     

The Cyclic Behavior of the U.S. Lodging Industry

A recently constructed data series suggests that the hotel industry has experienced two rather large building booms from 1969 to 1994. By contrast, hotel demand seems to move closely with the United States economy, at a much higher cyclic frequency. Occupancy and room rental rates follow the slower movements in supply. A structural model is estimated over this series which displays long lags between occupancy and room rental rate changes, as well as between room rental rates and new supply. These lags create a system of difference equations that is close to being dynamically unstable. Forecasting forward with smooth economic growth, yields a new and even larger future building boom.