Rent Control with Rent Discrimination Revisited

Abstract

George A. Kondor (1995) has recently developed a model that combines the imposition of third-degree price discrimination and rent control on a competitive housing market and found that such a regulatory regime might increase landlords' profits and cause the supply of rental housing to increase. As Kondor has pointed out, conventional analysis concludes that rent control leads to reductions in the quantity of housing and a redistribution of wealth from landlords to housing consumers. Most economists agree that old-fashioned rent control that freezes rents in nominal terms redistributes wealth, deters new construction, causes abandonment of housing units, reduces maintenance and mobility, creates mismatches between tenants and housing units, causes rental units to be converted to owner-occupied housing, and stimulates black markets and other methods (such as key money) for getting around the controls. However, one prominent urban economist (Arnott 1995) has a mildly dissenting view. Arnott believes that a well-designed version of newer forms of rent control (with exemptions for new construction, rent adjustments for inflation and verifiable increases in expenses, and regulations regarding maintenance) can be beneficial. For example, in a housing market that can be characterized by heterogeneous housing units, asymmetric information, and search costs, a moderate rent-control program can restrict the ability of landlords to use their market power. Problems caused by decreases in real rents do not arise with newer forms of rent control. Arnott further points out that, under such a system, an increase in the demand for housing leads to a greater increase in the quantity of housing supplied than with an uncontrolled market. With an uncontrolled market, an increase