Abstract
Court decisions in the 1970s dramatically changed the distribution of legal rights in the landlord-tenant relationship in seeking to improve the welfare of tenants, thought to be at a disadvantage in their search for housing. Both landlords and tenants contribute to the quality of services but the fact that the rights of ownership and use are separated prevents both parties from fully internalising the benefits of their efforts. The paper develops a simple model of the housing rental relationship capturing the impact which both landlord and tenant have on housing quality. It shows that, because of the moral hazard problem, the non-co-operative equilibrium of the model is inefficient in that, in the absence of any regulation, both parties invest too little in maintaining the quality of the unit. The model, assessing the relationship between the two parties, indicates that (i) increased landlord maintenance raises tenant utility and lowers landlord profits, (ii) the joint benefits of landlords and tenants first rise and then fall as greater maintenance is required, and (iii) housing quality varies ambiguously with landlord maintenance, given that increased maintenance is met with reduced tenant input.
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