Efficiency Rents: A New Theory of the Natural Vacancy Rate for Rental Housing

This paper adapts the theory of efficiency wages to explain the natural vacancy rate in rental housing markets. An equilibrium vacancy rate penalizes landlords who fail to maintain their units because if a tenant vacates a unit, the landlord will not be able to fill it immediately, thus costing him the rental income for a finite period of time. We provide evidence for the theory by showing that vacancy rates across metropolitan areas vary inversely with the stringency of state habitability laws. We also find some evidence for the search-cost theory of the natural vacancy rate.