Sticky Rents: A Simple Implicit-Contracts Theory

Hugh Montag () and Randal Verbrugge

No 26-12, Working Papers from Federal Reserve Bank of Cleveland

Abstract: Shelter inflation, driven by continuing-tenant rents, accounts for one-third of the consumer price index (CPI). Yet continuing-tenant rent inflation, notoriously sticky, has attracted almost no theoretical attention. Standard sticky price theories cannot explain the basic facts. We provide a simple theory yielding implicit contracts as an equilibrium. The landlord will wish to renege when costs rise; reputation is unavailable to enforce the contract. A well-established mechanism serves: landlord off-equilibrium-path play might result in renter frustration and endogenous breakup. Our implicit-contracts theory gracefully explains nominal (rather than real) rigidity, and provides a microfounded explanation of key rental market facts.

Keywords: continuing-tenant rent; inflation; frustration; customer anger; costly punishment (search for similar items in EconPapers)
JEL-codes: E31 R21 R31 (search for similar items in EconPapers)
Pages: 35
Date: 2026-05-27
New Economics Papers: this item is included in nep-hre, nep-mic and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwq:103313

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DOI: 10.26509/frbc-wp-202612

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