Excessive Rents and Non-Compliance with Price Ceilings

Christos Constantatos

South-Eastern Europe Journal of Economics, 2007, vol. 5, issue 2, 225-231

Abstract: Standard microeconomic theory warns us that price controls create incentives for non compliance. In this paper we analyze the suppliers' compliance with price ceilings decisions in a competitive sector, focusing on rent controls. We conclude that, first, forcing a non-complying landlord to simply return all payments in excess of the maximum allowed amount constitutes an implicit, nevertheless effective, real penalty. Second, instead of bringing the price back to its free market level, black market results to some implicitly defined ceiling, above the legal one. Third, as the gap between the ceiling and the free market price increases, the efficiency of fixed fines relative to that of proportional fines is reduced.

Keywords: Price ceiling; compliance; demand elasticity; penalty schemes (search for similar items in EconPapers)
JEL-codes: D40 K42 L50 (search for similar items in EconPapers)
Date: 2007
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