A Micro Analysis of the Impact of Information Asummetry and Regulations on Equilibrium Outcomes in Rental Markets Brent W. Ambrose; Moussa Diop May 15, 2016 Ambrose, Brent W., and Diop, Moussa May 15, 2016 1 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Contribution? ◮ The pricing of most regulations into rent is well documented (Hirch et al. (1975); Miron (1990); Malpezzi (1996)) Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Contribution? ◮ The pricing of most regulations into rent is well documented (Hirch et al. (1975); Miron (1990); Malpezzi (1996)) ◮ The effect of regulations on tenant screening by landlord is less well known because landlord effort may not be directly observable (Miron (1990)) Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Contribution? ◮ The pricing of most regulations into rent is well documented (Hirch et al. (1975); Miron (1990); Malpezzi (1996)) ◮ The effect of regulations on tenant screening by landlord is less well known because landlord effort may not be directly observable (Miron (1990)) ◮ Examine lease defaults, but the relation between regulations on lease default is ambiguous Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Contribution? ◮ The pricing of most regulations into rent is well documented (Hirch et al. (1975); Miron (1990); Malpezzi (1996)) ◮ The effect of regulations on tenant screening by landlord is less well known because landlord effort may not be directly observable (Miron (1990)) ◮ Examine lease defaults, but the relation between regulations on lease default is ambiguous What kind of regulations? Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Research Question Impact of regulations on landlord decision? ◮ Rent ◮ Tenant screening and resulting lease default Contribution? ◮ The pricing of most regulations into rent is well documented (Hirch et al. (1975); Miron (1990); Malpezzi (1996)) ◮ The effect of regulations on tenant screening by landlord is less well known because landlord effort may not be directly observable (Miron (1990)) ◮ Examine lease defaults, but the relation between regulations on lease default is ambiguous What kind of regulations? ◮ Tenant-protection laws that increase the cost of tenant default to landlords ◮ Cost-benefit trade-off Ambrose, Brent W., and Diop, Moussa May 15, 2016 2 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Not an equilibrium model; we parameterize the rent-regulations relationship Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Not an equilibrium model; we parameterize the rent-regulations relationship Two tenant types: Good ( θ = 1) and Bad ( θ = 0) Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Not an equilibrium model; we parameterize the rent-regulations relationship Two tenant types: Good ( θ = 1) and Bad ( θ = 0) Proportion of bad tenants in the population is δ , giving unconditional probabilities � 1 with probability 1 − δ θ = . 0 with probability δ Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Not an equilibrium model; we parameterize the rent-regulations relationship Two tenant types: Good ( θ = 1) and Bad ( θ = 0) Proportion of bad tenants in the population is δ , giving unconditional probabilities � 1 with probability 1 − δ θ = . 0 with probability δ Tenant quality not directly observable by landlord; instead, landlord receives a signal s ∈ [0 , 1] of tenant’s quality θ drawn from this following conditional density function (Quint, 2005) � α s α − 1 if θ = 1 f ( s | θ ) = α (1 − s ) α − 1 if θ = 0 Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Simple Tenant Screening Model One-period model capturing a landlord’s incentives to screen tenants Not an equilibrium model; we parameterize the rent-regulations relationship Two tenant types: Good ( θ = 1) and Bad ( θ = 0) Proportion of bad tenants in the population is δ , giving unconditional probabilities � 1 with probability 1 − δ θ = . 0 with probability δ Tenant quality not directly observable by landlord; instead, landlord receives a signal s ∈ [0 , 1] of tenant’s quality θ drawn from this following conditional density function (Quint, 2005) � α s α − 1 if θ = 1 f ( s | θ ) = α (1 − s ) α − 1 if θ = 0 α , the quality of the signal ( α ≥ 1), also measures the landlord’s investment in tenant screening; as α increases, the quality of the signal improves Ambrose, Brent W., and Diop, Moussa May 15, 2016 3 / 27
Landlord’s Problem max α ≥ 1 E [ Rent ( Regulations ) | s ] − c ( α ) − g ( x ) ⇐ ⇒ (1 − δ ) s α − 1 � � max · Rent ( Regulations ) − c ( α ) − g ( x ) (1 − δ ) s α − 1 + δ (1 − s ) α − 1 α ≥ 1 Where, ◮ c ( α ), total cost of investment in screening ◮ g ( x ), rental cost due to a vector x of variables (1 − δ ) 2 s 2 α − 2 + 2 δ (1 − δ ) [ s (1 − s )] α − 1 + δ 2 (1 − s ) 2 α − 2 � � Rent ( Reg . ) = c ′ ( α ) . δ (1 − δ ) ln( s ) [ s (1 − s )] α − 1 − δ (1 − δ ) ln(1 − s ) [ s (1 − s )] α − 1 Ambrose, Brent W., and Diop, Moussa May 15, 2016 4 / 27
Rent and Cost Functions Rent assumed strictly increasing and concave function of regulations described by this reduced-form relationship � Rent ( Regulations ) = ψ 0 + ψ 1 Regulations Ambrose, Brent W., and Diop, Moussa May 15, 2016 5 / 27
Rent and Cost Functions Rent assumed strictly increasing and concave function of regulations described by this reduced-form relationship � Rent ( Regulations ) = ψ 0 + ψ 1 Regulations As expected, the parameterization of the rent equation yields positive ψ 0 and ψ 1 Ambrose, Brent W., and Diop, Moussa May 15, 2016 5 / 27
Rent and Cost Functions Rent assumed strictly increasing and concave function of regulations described by this reduced-form relationship � Rent ( Regulations ) = ψ 0 + ψ 1 Regulations As expected, the parameterization of the rent equation yields positive ψ 0 and ψ 1 Screening costs strictly increasing and convex function of α , the level of screening choosen by the landlord c ( α ) = ( α − 1) 2 Ambrose, Brent W., and Diop, Moussa May 15, 2016 5 / 27
Rent and Cost Functions Rent assumed strictly increasing and concave function of regulations described by this reduced-form relationship � Rent ( Regulations ) = ψ 0 + ψ 1 Regulations As expected, the parameterization of the rent equation yields positive ψ 0 and ψ 1 Screening costs strictly increasing and convex function of α , the level of screening choosen by the landlord c ( α ) = ( α − 1) 2 Results are unchanged when we use log for the rent equation or exponential for total screening costs Ambrose, Brent W., and Diop, Moussa May 15, 2016 5 / 27
Regulations and Tenant Screening Signals, regulation, and screening investment for Rent ( Regulation ) = ψ 0 + ψ 1 � Φ ( Regulation ) and c ( α ) = ( α − 1) 2 5.5 Regulation = − 1 . 5 Regulation = 0 Regulation = 1 . 5 5 4.5 4 Screening investment α 3.5 3 2.5 2 1.5 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Signal realization s Figure: Regulation and Screening for δ = 0 . 1 Ambrose, Brent W., and Diop, Moussa May 15, 2016 6 / 27
Regulations and Tenant Screening � Φ ( Regulation ) and c ( α ) = ( α − 1) 2 Signals, regulation, and screening investment for Rent ( Regulation ) = ψ 0 + ψ 1 8 Regulation = − 1 . 5 Regulation = 0 Regulation = 1 . 5 7 6 Screening investment α 5 4 3 2 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Signal realization s Figure: Regulation and Screening for δ = 0 . 2 Ambrose, Brent W., and Diop, Moussa May 15, 2016 7 / 27
Regulations and Tenant Screening Default probability, regulation, and screening investment for Rent ( Regulation ) = ψ 0 + ψ 1 � Φ ( Regulation ), c ( α ) = ( α − 1) 2 , and s = 0 . 55 8.5 Regulation = − 1 . 5 Regulation = 0 Regulation = 1 . 5 8 7.5 7 Screening investment α 6.5 6 5.5 5 4.5 4 3.5 0.05 0.1 0.15 0.2 0.25 Probability of default δ Figure: Screening as a function of probability of default for s = 0 . 55 Ambrose, Brent W., and Diop, Moussa May 15, 2016 8 / 27
Methodology Identify and measure relevant regulations 1 Ambrose, Brent W., and Diop, Moussa May 15, 2016 9 / 27
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