OWNER TENANCY AS CREDIBLE COMMITMENT UNDER UNCERTAINTY

How do landlords provide credible signals to tenants that they will ma intain the building when the needed upkeep over the contract period is uncertain at the time that rental decisions are made? In this paper, we develop a model of credible commitment under uncertainty wherein ow ner tenancy serves as the commitment signal to the market. In comparin g completely tenant-occupied (absentee landlord) to partially owner-oc cupied buildings, the model predicts that in the latter case, the equi librium rent is higher. We test this prediction using rental data for a sample of office buildings, some of which are completely tenant-occu pied while others are partially owner-occupied. The results indicate t hat, as predicted by the model, rents are significantly higher when la ndlords can signal a commitment to high-performance standards.