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Controlling the Incentive Problems in Real Estate Leasing

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  • Benjamin, John D
  • de la Torre, Cris
  • Musumeci, Jim

Abstract

This paper develops a formal model that characterizes potential conflicts of interest between real-estate landlords and tenants. The model demonstrates a tenant's incentive to undermaintain overuse (i,e., abuse) a leased property while highlighting the moral hazard problem as a cause of the failure of the lease irrelevance proposition. As a consequence, the lease irrelevance proposition's failure implies that if tenant abuse incentives are left unrestricted, the market for leased real estate may cease to function. he efficacies of various lease arrangements suggested by Smith and Wakeman (1985) and other researchers in controlling the tenant abuse incentives are evaluated in this framework as a means of counteracting the inherent problems. Our analysis supports the greater use of variable lease schemes (e.g., security deposits and penalty clauses), which peg real-estate lease rates to the level of property abuse rather than more traditional fixed payment contracting arrangements. Copyright 1995 by Kluwer Academic Publishers

Suggested Citation

  • Benjamin, John D & de la Torre, Cris & Musumeci, Jim, 1995. "Controlling the Incentive Problems in Real Estate Leasing," The Journal of Real Estate Finance and Economics, Springer, vol. 10(2), pages 177-191, March.
    • Handle: RePEc:kap:jrefec:v:10:y:1995:i:2:p:177-91
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    Cited by:

    1. Peter Chinloy & Eric Maribojoc, 1998. "Expense and Rent Strategies in Real Estate Management," Journal of Real Estate Research, American Real Estate Society, vol. 15(3), pages 267-282.
    2. Iwata, Shinichiro & Yamaga, Hisaki, 2008. "Rental externality, tenure security, and housing quality," Journal of Housing Economics, Elsevier, vol. 17(3), pages 201-211, September.
    3. John Benjamin & Chris de la Torre & Jim Musumeci, 1998. "Rationales for Real Estate Leasing versus Owning," Journal of Real Estate Research, American Real Estate Society, vol. 15(3), pages 223-238.
    4. Randy E. Dumm & Charles Nyce & G. Stacy Sirmans & Greg T. Smersh, 2022. "Pricing Moral Hazard in Residential Properties: The Impact of Sinkhole Claims on House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 64(1), pages 30-70, January.

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