Perverse Effects of Imperfectly Enforced Price Controls

We study the effects of a rent control policy when enforcement relies on tenant complaints rather than government monitoring. We show theoretically that when tenants differ in their ability to enforce the rent cap, adverse selection arises: landlords set rents anticipating how enforcement risk depends on the composition of tenants. Higher listed rents deter tenants who are unlikely to enforce the cap, increasing enforcement risk and inducing further rent increases.

The resulting equilibrium rents are higher than in the no regulation benchmark and depend negatively on the rent cap level. Using rental listings data from Vienna between 2012 and 2022, we test the model's predictions by exploiting policy changes and institutional variation in rent caps. We find that tighter rent control leads to 76 EUR higher posted rents on average, consistent with our theoretical predictions.