Efficiency of a regulated housing market: With rent controls, transaction costs and centralized matching costs

The major hypotheses of this research are: (1) rent controls can be efficient if the costs of transaction (search, matching, rationing) in the controlled market are lowered by centralized matching as is apparently the case in some European housing markets; (2) in such European housing markets there is an optimum size for the controlled market when rent controls are imposed; (3) rent controls become inefficient if the utility of housing quality is important and landlords are not required to maintain quality; (4) the best policy to collect the cost of matching households and dwellings in a centralized rent controlled market is to charge a fee only to those agents that benefit from rent control. In order to investigate these hypotheses, a logit model of housing demand is developed and a series of numerical simulations are conducted. As a market efficiency measure, changes in the total compensating variation are observed. Two types of models are developed. In the first model, search is, allowed in the free market, but not in the controlled market. Households and landlords are matched through a centralized matching process and cannot meet to freely decide rents. In the second model, search is allowed in both sub-markets. Transaction costs which include search and waiting costs are determined endogenously in each type of model. Housing quality in the controlled market is allowed to be lower than that in the free market due to rent control. Among others, major results obtained are: (1) rent controls are efficient if there are some gains in the transaction costs due to the benefits of centralized matching; (2) there is an optimum size for the rent controlled sub-market; (3) the market efficiency of rent control is heavily influenced by the importance of housing quality; (4) the best policy of charging centralized matching fees is to charge such fees only to the tenants in the controlled market.