Rent control with reputation: theory and evidence

Rent-control policy is modeled as an implicit contract between voters of a community and suppliers of rental housing. It is shown that if residents can make an ex ante commitment to never adopt rent controls they will do so. When precommitment is not possible there are conditions under which a policy of never adopting rent controls is not self-enforcing. Under such circumstances a state-invariant ceiling price is shown to be a subgame-perfect equilibrium rent-control policy. The model is tested using data for New Jersey where local option regarding the choice of rent control policy was declared constitutional in the early 1970s. Probit analysis is used to determine whether predictions of the model are supported by an investigation of factors leading to imposition of rent controls by 64 of the 245 communities in the sample. (C) 1998 Published by Elsevier Science B.V. All rights reserved.