A DYNAMIC-MODEL OF LANDLORD REINVESTMENT BEHAVIOR

In this paper we develop a dynamic model of a landlord's decision to invest in the maintenance and rehabilitation of housing. The model incorporates the intertemporal nature of the problem, uncertainty, the role of future expectations, the extreme durability of housing, and the notion of adjustment costs. This model is an application of T. J. Sargent's (''Macroeconomic Theory.'' Academic Press, Or lando, 1987) infinite horizon model of investment under uncertainty to housing reinvestment. Intertemporality and convex adjustment costs in the model lead to the result of a reinvestment path being optimal rather than a single-time reinvestment effort, even if depreciation did not occur periodically. Two versions of the model are developed: (1) under perfect competition and (2) under nan-perfect competition. Both models are solved analytically and yield explicit solutions. The solutions show the relationship between the optimal path of reinvestment and current and expected future rental prices, expenditures of the landlord related to the level of housing services (such as property taxes), costs of maintenance, and the adjustment cost factor. The model suggests that the objective of good quality housing is better served by a smooth path of reinvestment rather than by a sporadic path that involves bulky adjustments. This paper discusses situations, in the context of the model, in which deterioration, upgrading, maintaining at a constant quality, demolition, and abandonment of housing may be optimal. The contributions of this paper are the incorporation of intertemporality, adjustment costs, endogeneity of the life of a dwelling, extreme durability of housing, and uncertainty in a model of landlord reinvestment behavior that yields explicit solutions to the optimal path of maintenance. (C) 1995 Academic Press, Inc.