Housing Allowance and Rents: Evidence from a Stepwise Subsidy Scheme*

In this paper, we study the effect of housing demand subsidies on rents using discontinuities in the Finnish housing allowance system as a quasi‐experimental setting. The stepwise dependence of housing allowance on the floor area of the dwelling and on the year of construction of the building causes economically and statistically significant discontinuities in the amounts of housing allowances. However, our results show that there are no discontinuities in the rents paid by the recipients of housing allowance at these cut‐offs. Instead, differences in the amounts of housing allowance are translated roughly one‐to‐one into differences in the rent net of housing allowance.