Equilibrium Excess Demand in the Low Income Rental Housing Market: Theory and Experimental Evidence

Katherine Cuff, Nicolas Marceau, Reyhaneh Nikoonejad and Bradley Ruffle

No 12808, CESifo Working Paper Series from CESifo

Abstract: We develop a model of monopolistic competition in the rental housing market for low-income households with endogenous tenancy default. Identical suppliers choose the number of rental units to supply and the rental price to charge to maximize expected profits. Potential tenants who differ in their incomes and face an uninsurable income risk choose whether to engage in a costly search for rental housing. If they search and find a rental unit, then they must commit to a rental agreement before their income uncertainty is resolved. Consequently, some tenants may default on their rental payments. We show that tenancy default can explain persistent excess demand in the low-income rental housing market without any government price regulations, and that such excess demand can lead to nonstandard effects of government regulations. We also test whether the excess-demand equilibrium is behaviorally plausible by designing a laboratory experiment. Our experimental results reveal that, with feedback and repetition, the excess-demand equilibrium that requires landlord participants to restrict supply is no more difficult for participants to reach than a market-clearing equilibrium.

Keywords: tenancy default; excess demand; rental housing policies; market experiment (search for similar items in EconPapers)
JEL-codes: C91 D41 R21 R31 R38 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-exp, nep-hre and nep-uep
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