The Tenant's Decreasing Willingness to Pay and the Rent Abatement Phenomenon

Abstract

It has been observed that, as a rule, new tenants pay higher rents than oldestablished tenants for the same type of flat in the same building: Rents actually paid seem to be influenced negatively by the previous duration of the tenancy1. Let us call this the rent abatement phenomenon. The only theoretical explanation for this phenomenon I am aware of has been given by Eekhoff [1981]. He argues that the German tenants' protection legislation, which reduces the scope for rent increases during a tenancy, is conductive to rent abatement2. The phenomenon, however, has been observed in Germany also before the relevant bills have been passed, and it can be observed in other countries as well: The "legal" interpretation of the phenomenon seems not to be able to capture the whole of the story3. The purpose of the present note is to offer an alternative theoretical explanation for rent abatement. It rests on the proposition that the willingness to pay of the tenant decreases with the length of the tenancy because his economic situation changes and the previously optimal flat becomes suboptimal in the course of time. 1. The Tenant's Decreasing Willingness to Pay