Leases over real property

Abstract

This paper develops a model in which housing incurs a property damage for which the tenant must sue in order to be made whole. The model is analyzed under both market rents and rent control regimes, as well as for tenants with limited wealth, bilateral (tenant) investment, coinsurance, and rent abatement. The model facilitates the evaluation of several policies, such as rent control, landlord–tenant laws, income redistribution, tenant’s insurance, and rent abatement. The model makes several predictions which are consistent with empirical findings in housing economics, such as why the poor occupy housing of worse condition and how laws shifting liability onto the landlord increase the quality of housing for poor tenants as well as increase rent prices. It also nests classic hypotheses, such as the Calabresi’s efficiency of strict liability rules and the least cost avoider, in addition to clarifications on Friedman’s prediction that rent control decreases investment.