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Renewing a Lease at a Discount or Premium?

Siu Kei Wong () and Ka Shing Cheung ()
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Siu Kei Wong: The University of Hong Kong
Ka Shing Cheung: The University of Hong Kong

Journal of Real Estate Research, 2017, vol. 39, issue 2, 215_234

Abstract: Occupancy discount is a long-accepted doctrine in literature. Search theory supports such a proposition, but empirical evidence is mixed. This study revisits this dilemma and puts forward an alternative argument that a landlord may exploit sitting tenants who have made non-redeployable investments and charge them an occupancy premium. Based on data of high-end commercial properties where quality information is symmetric, this study confirms that the magnitude of discounts/premiums hinges on the tradeoff between asset specificity and search. It also demonstrates that instrumental variables estimation is a better approach to correcting endogeneity bias in lease renewal decisions.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:jre:issued:v:39:n:2:2017:p:215_234