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A theory of sticky rents: Search and bargaining with incomplete information

Joshua Gallin and Randal Verbrugge ()

Journal of Economic Theory, 2019, vol. 183, issue C, 478-519

Abstract: This paper offers the first theoretical explanation of housing rent stickiness and differential stickiness by housing structure type, key features of rental markets worldwide. Previous theoretical work on the subject is sparse and explains why some landlords charge below-market rents, not stickiness. Apart from its interest for understanding housing markets and overall inflation, rent stickiness is intriguing because it shows that stickiness can emerge in markets where the typical menu cost logic does not apply, and where market participants typically engage in repeated bargaining over contracts. Our model involves search and bargaining with incomplete information in a two-period game, and generates stickiness in a novel manner. The key decision is the landlord's choice of whether to renegotiate, or not. Crucially, landlords do not know tenant perceptions of unit quality. The key force generating stickiness is that offering the identical contract preempts tenant search, thus limiting tenants' outside options, and resolves uncertainty early. Risk aversion reinforces this mechanism and yields differential stickiness by landlord type. Renegotiation risk for large landlords disappears because the different outcomes—rent increase, rent decrease, and vacancy—“average out.” Landlords who manage only one unit loathe vacancy, and are highly motivated to avoid renegotiation.

Keywords: Price stickiness; Search; Incomplete information; Repeat rent index (search for similar items in EconPapers)
JEL-codes: C7 C78 D4 D83 E3 R31 (search for similar items in EconPapers)
Date: 2019
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Working Paper: A Theory of Sticky Rents: Search and Bargaining with Incomplete Information (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:478-519

DOI: 10.1016/j.jet.2019.06.003

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