The experience with rent control in Israel: From rental housing to condominiums

During the past decades, home ownership has replaced privately owned rental housing as the dominant form of tenure in Israel. An important factor in this transition has been rent control. This paper examines the development of the rent control system, surveys the other major housing policies, and considers the main effects of rent control on the housing market.The Israeli rent control system is characterized by far reaching security of tenure; rent ceilings that are a fraction of the free-market rent; legalized key money shared between owner and tenant; and decontrol after a tenant dies or the landlord repurchases the unit. Consequently, the construction of privately owned rental housing has ceased. The controlled sector is disappearing, and the remaining stock is badly undermaintained and deteriorating.     

The Value of the Rent Control Option

In this paper, we combine direct arbitrage arguments and an option-pricing approach to develop a method of pricing the option for rent control. For a lump-sum payment of key money, a tenant acquires the right to rent a real estate unit for an exogenously determined controlled rent, as opposed to paying the free-market rent. The tenant may continue exercising this right as long as he or she lives. Alternatively, the tenant may sell the right to occupy the controlled rent unit and receive a fraction of the key money paid by the subsequent tenant. We value the equilibrium key money, in a representative agents partial equilibrium, while endogenously determining the expected tenure duration in a controlled rent unit. We propose a procedure for valuing rent control options different from the representative agents. Our analysis shows that under real-world levels of conditional life expectancy, the level of the fraction of the key money retained by a departing tenant has an insignificant effect on the expected tenure duration in a controlled rent unit and on the level of key money.     

The impact of settlement period on sales price

This study is an empirical investigation of the impact of settlement period on sales price while controlling for marketing period and standard explanatory variables. The hypothesized positive relationship between settlement period and sales price is confirmed by the results of this study. The estimated coefficient on settlement period is 0.0008 meaning that our market, on average, exacts a premium of 0.08 percent per day of settlement period beyond a norm of 60 days. The estimated coefficient on marketing period (a control variable) is –0.0003 meaning that our market, on average, requires a discount of 0.03 percent per day of marketing period. Our findings show the relative importance of settlement period in making real estate pricing decisions.     

Interest-only and principal-only mortgage strips as interest-rate contingent claims

Interest-only (IO) and principal-only (PO) mortgage strips are valued in a stochastic interest-rate environment. The prepayment rate of the underlying mortgages is affected by two considerations not present in the pure financially rational model: (1) The property owner's holding period is assumed to follow a Gamma distribution, resulting in the possibility of prepayment due to the sale of the property (i.e., prepayment that is too early based on market interest rates); and (2) borrowers are assumed to face heterogeneous transaction costs related to refinancing the existing mortgage, and delay refinancing when market conditions make it optimal to do so (refinancing too late). Properties of IO/PO strips are identified by the finite difference method.     

On a Simple Econometric Approach for Utility-Based Asset Pricing Model

The Journal of Finance has published an important paper entitled A Simple Econometric Approach for Utility-Based Asset Pricing Model by Brown and Gibbon (1985). The main purpose of this paper is to extend the research of Brown and Gibbons (1985) and Karson, Cheng and Lee (1995) in estimating the relative risk aversion (RRA) parameter in utility-based asset pricing model. First, we review the distributions of RRA parameter estimate . Then, a new method to the distribution of is derived, and a Bayesian approach for the inference of is proposed. Finally, empirical results are presented by using market rate of return and riskless rate data during the period December 1925 through December 2001.     

Commodity Taxation and Social Welfare: The Generalized Ramsey Rule

Commodity taxes have three distinct roles: (1) revenue collection, (2) interpersonal redistribution, and (3) resource allocation. The paper presents an integrated treatment of these three concerns in a second-best general equilibrium framework, which leads to the generalized Ramsey rule for optimum taxation. We show how many standard results on optimum taxation and tax reform have a straightforward counterpart in this general framework. Using this framework, we also try to clarify the notion of deadweight loss, as well as the relation between alternative distributional assumptions and the structure of optimum taxes.     

Economic and political aspects of negotiated rents in the Swedish housing market

The aim of this paper is to describe the rent control system in Sweden, evaluate the effects on consumption and production in the housing market, and provide a public choice explanation of the present rent control system.The first section of this paper contains introductory remarks and an overview of the rental market in Sweden. The Swedish rent control system and its prerequisites are described in section 2. Attention is given to two important prerequisites: the existence of a large municipal housing sector and a strong tenants' movement. As a result, a rent system has been developed with all rents set by negotiations. The rent structure is determined by a fairness principle, which has some resemblance to market adapted rents. The rent level will be determined by a non-profit condition in municipal housing companies.In section 3 the effects of the existing rent control system are discussed with the municipality of Stockholm as a test case. Effects on rent level and rent structure are evaluated, and the relation between rent policy in municipal housing companies and resulting rents in private housing is analyzed. Gains and losses to tenants and landlords are evaluated as well as effects on construction and maintenance.In section 4 a political perspective is discussed. The aim is to explain why the system is not implemented in the market adapted way it was intended. Finally, the future of the rent system is discussed.     

Banks as Interest Rate Managers

Most banks have a two-tier pricing system, offering accounts at market-related interest rates and at posted rates that are changed at discrete intervals. In this paper, I develop a model of bank interest rate management. I consider a bank with two classes of loans and deposits in its balance sheet: One pays a market rate of interest, the other a posted rate. Market rates are exogenous and evolve stochastically over time. Posted rates are altered intermittently by the bank itself. The bank faces imperfect arbitrage by its customers between posted and market rate funds. Under simple assumptions about the stochastic process governing the market rate, I derive optimal decision rules for the adjustment of the posted rate and determine conditions under which these rules are asymmetric. A key prediction of the model is a negative correlation between market loan rates and the gap; this is more consistent with the behavior of British banks than is the contrary prediction of more standard models.     

Government Deposit Insurance and the Diamond-Dybvig Model

The apparent banking market failure modeled by Diamond and Dybvig [1983] rests on their inconsistently applying their sequential servicing constraint to private banks but not to their government deposit insurance agency. Without this inconsistency, banks can provide optimal risk-sharing without tax-based deposit insurance, even when the number of type 1 agents is stochastic, by employing a contingent bonus contract. The threat of disintermediation noted by Jacklin [1987] in the nonstochastic case is still present but can be blocked by contractual trading restrictions. This article complements Wallace [1988], who considers an alternative resolution of this inconsistency.     

Heterogeneity in Financial Market Participation: Appraising its Implications for the C-CAPM

This paper presents empirical evidence that accounting for heterogeneity in financial market participation is important for evaluating the empirical performance of the Consumption-based Capital Asset Pricing Model (C-CAPM). Using the US Consumer Expenditure Survey as a common testing ground, I re-assess three well-known characterizations of the equity premium puzzle (i) the inconsistency of the representative agent's IMRS with Hansen and Jagannathan bounds; (ii) Mehra and Prescott's calibration of a large representative agent's risk aversion; (iii) Hansen and the Singleton's large structural estimates of the preference parameters based on aggregate data. In all three cases, the estimates of risk aversion conditional upon financial market participation are not as far from reasonable values as the corresponding unconditional ones. The differences suggest that part of the equity premium puzzle can be accounted for by the use of a representative agent assumption rather than a more appropriate "representative stockholding agent assumption.     

The Information Content of Bank Examinations

We identify three types of information from bank examinations—auditing information from verifying the honesty and accuracy of the bank's books, regulatory discipline information about the treatment of the bank by regulators, and private information about bank condition. We estimate these information effects by comparing the cumulative abnormal market returns associated with examinations in which the CAMEL rating remained unchanged, improved, and worsened. All three information effects are found to be greater for banks entering the examination process with unsatisfactory ratings from prior examinations. The only consistently strong effect found is that examination downgrades appear to reveal unfavorable private information about bank condition. The evidence also suggests that the information may reach the market in part through loan quality data released in quarterly financial statements.     

Corporate Real Estate and Stock Market Performance

An interesting question in corporate real estate literature is whether real estate can improve the stock market performance of property-intensive non-real estate firms. Using a data set comprising 75 non-real estate corporations that own at least 20 percent properties, this paper empirically assesses and compares the pair-wise return, total risk, systematic risk and Jensen abnormal return performance of composite (with real estate) and hypothetical business (without real estate) firms. We employed Morgan Stanley Capital International world equity index instead of a local market index to provide some insights into the performance of the local market relative to the global market during the 1997–2001 volatile periods experienced by many Asian countries. Our results suggest the inclusion of real estate in a corporate portfolio appears to be associated with lower return, higher total risk, higher systematic risk and poorer abnormal return performance. It is therefore likely that non-real estate firms own properties for other reasons in addition to seeking improvement in their stock market performance. Further research is needed to explore the main factors contributing to corporate real estate ownership by non-real estate firms.     

Company Tax Structure and Company Tax Incidence

This paper reviews conflicting theories of company tax incidence impliedby the alternative new and traditional views of dividends andexamines their contrasting policy implications. Whereas, under thetraditional view, closer integration of the corporate and personalincome tax systems is suggested, an alternative policy orientationemphasizing the non-distorting features of the classical system is impliedby the new view. Even if the traditional view is accepted, theimplications for design and reform of the company tax vary widely underalternative specifications of domestic and international tax policy objectives. Schedular alternatives to global income taxation are alsoconsidered.     

Do Market Makers Suffer from Splitting Headaches?

Studies of transactions surrounding stock split ex-dates often conclude that splitting firms either experience a decline or an improvement in their stock's liquidity, based on independent measures of trading costs and trading activity. In contrast, our evidence suggests that splits from outside into what often is deemed to be the optimal stock price range of $10.00 to $39.99 are nonevents for market makers: The spread-setting behavior of the market does not change after a split. Our analysis accounts for the interdependencies between bid-ask spreads and market microstructure effects and distinguishes between optimal and all other splitting firms.     

Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty

A representative individual lives for two periods; works when young and depends on savings and a government operated social security system when old—the returns on both sources of income, when old, are random. Due to administrative problems the returns to savings are observed with some measurement error. Two alternative consumption tax systems are considered; the Registered Asset Treatment (RAT) and the Non-Registered Asset Treatment (NRAT). The advantage of the RAT is that it can perform a social insurance role while the disadvantage is that it imposes measurement error risk. Correlation between the random return on saving and its measurement error can provide a risk-hedging role that can be further strengthened by the RAT version. The NRAT version neither provides social insurance nor imposes measurement error risk. Both tax systems hedge against the uncertainties in the social security system. The taxpayer engages in precautionary saving in response to future uncertainty.     

A General Theorem on the Comparative Statics of Changes in Risk

In this paper, the concept of absolutely riskier than is introduced to generalize Gollier's (Journal of Economic Theory, 66, 522–535) necessary and sufficient conditions for the comparative statics of a change in risk for risk averters. The restrictive assumption that the payoff function is monotonic in the risk is relaxed. The policymaker's choice problem, the newsboy problem, and a farmer's example are used to illustrate how easily the monotonicity assumption is violated. Finally, some important properties of the concept of absolutely riskier than, such as its relation with the concept of second-order stochastic dominance, are illustrated using the farmer's example.     

Computing a Multivariate Normal Integral for Valuing Compound Real Options

We extend the Geske (1979) model to a multivariate normal integral for the valuation of a compound real option. We compared the computing speeds and errors of three numerical integration methods, namely, Drezner's improved Gauss quadrature method, Monte Carlo method and Lattice method, together with appropriate critical value finding methods. It is found that secant method for finding critical values combined with Lattice method and run by Fortran took merely one second, Monte Carlo method 120 seconds. It is also found that the real option decreases with interest rate, not necessarily positively correlated with volatility , a result different from that anticipated under financial option theory. This is mainly because the underlying of real option is a non-traded asset, which brings dividend-like yield into the formula of compound real options. Dividend-like yield rises with the multiplication of correlation coefficient and . High indicates the poor diversification advantage of the new investment project in relation to the existing market portfolio, and the value of real call option decreases with . Conversely, when is low, the proposed project provides better diversification advantage and the real call option rises with . Irrespective of the value of , when interest rate increases, the value of real call option drops, especially when is high, the value of the project is dominated by interest rate.     

Bank lending ‘manias’ in theory and history

A popular view of banking crises sees them as consequences of prior bank lending manias. Such manias are supposed to be especially likely in legally unrestricted banking systems, where banks can issue notes and are not subject to statutory reserve requirements. Here it is argued that the bank lending mania hypothesis (1) exaggerates the role of subjective factors, including bankers' confidence or optimism, as a stimulus to bank lending, and (2) is not supported by evidence from past, legally unrestricted banking systems.     

Investor efficiency in the face of takings

Governmental entities at all levels are empowered to acquire private property for the public's benefit, provided that just compensation is paid. The level of compensation typically viewed by courts as just is market value, but questions arise as to whether market value compensation motivates the private owner of land, potentially subject to a taking, to improve the property to a degree that is socially efficient. Earlier works have found market value to be a compensation level too high to promote efficiency. The present paper offers an analysis, based on a simple model of investor profit maximization, that provides a unified view of models presented in some important earlier works. In a special application of the general case, it is shown that market value can be too low a level of compensation to promote efficient behavior by the land owner.     

Getting the Unemployed Back to Work: The Role of Targeted Wage Subsidies

This paper examines alternative approaches to wage subsidy programmes. It does this in the context of a recent active labour market reform for the young unemployed in Britain. This New Deal reform and the characteristics of the target group are examined in detail. We discuss theoretical considerations, the existing empirical evidence and propose two strategies for evaluation. The first suggests an ex-post trend adjusted difference in difference estimator. The second, relates to a model based ex-ante evaluation. We present the conditions for each to provide a reliable evaluation and fit some of the crucial parameters using data from the British Labour Force Survey. We stress that the success of this type of labour market programmes hinge on dynamic aspects of the youth labour market, in particular the pay-off to experience and training.