Resolution of Demand Uncertainty and Competitive Rent Adjustment

Abstract

This article shows that even when the tenants can acquire the information about rents at no cost, it is possible to get rent dispersion if there is uncertainty about the demand in the market. The equilibrium with rent dispersion has the property that rents rise with the arrival of new tenants. However, even though identical units are offered at different rents, each unit generates zero expected profits. This is because a unit offered at a high rent has a smaller probability of being rented than does a unit offered at a lower rent. If demand uncertainty is resolved sequentially, then rents reveal an increasing trend through time because units with lower rents are rented before units with higher rents. Vacancies are also possible in the current model because some of the units with higher rents might not be rented depending on the realization of total demand in the market.