CONTRACTING WITH COSTLY TENANTS

This paper analyses rental contracts in the housing market assuming as ymmetric information about tenant-related 'service cost' and imperfect mobility. On the positive side, it explains why long-standing tenants tend to enjoy lower rents - the so-called 'tenure discount'. On the n ormative side, it shows that the market equilibrium is not efficient, because contracts protecting the tenant against arbitrary eviction suf fer from adverse selection. Tenure security laws, therefore, have the potential to improve welfare.