Working Paper

A Theory of Sticky Rents: Search and Bargaining with Incomplete Information

Abstract: The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants? rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in the absence of menu costs or other commonly used modeling assumptions. Tenants? valuations of their units, and whether they are considering other units, are both private information. At lease end, the behavior of risk-averse landlords differs according to the number of units managed. Multi-unit landlords, aided by the law of large numbers, exploit tenant moving costs. When renegotiating rent contracts, they set rent increases that exceed the inflation rate; while the majority of tenants stay, those who place low value on the unit search elsewhere and leave. Landlords with one unit loathe vacancy and offer tenants the identical contract to pre-empt search; only those who really hate the unit leave.

Keywords: Price stickiness; Bargaining; Search; Incomplete information; ;

JEL Classification: C7; C78; D4; D83; D9; E3; R31;

https://doi.org/10.26509/frbc-wp-201705

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2017-05-05

Number: 1705

Pages: 38 pages