Rent Control and Misallocation

Abstract

Rent control is still an important type of government regulation of housing markets in many countries and numerous researchers have studied its implications for allocation, welfare and investments in housing. The present paper aims to improve our understanding of the effect of second-generation rent control when it is applied only to one sector of the rental market. It is diagrammatically shown that the welfare effects are very different between a universal and a limited application of rent control. Studying the Danish case of second-generation rent control, lower rents are found in controlled sectors and a minor increase of the rent in the uncontrolled sector. Using the area of living space in the dwelling as a measure for housing consumption, evidence is also produced of both overallocation and underallocation of housing in the rent-controlled sectors; as envisaged by economic theory.