Wednesday, October 7, 2009

Rents differ markedly from user costs in the US

Economic theory tells us that at least in the long run and under perfect competition, marginal revenue should equal marginal cost. With free entry, one should even observe that price equals costs, as profits are driven to zero. So it is puzzling when when one observes persistent deviations from this equality.

Randal Verbrugge notes that this is the case for housing rents in the United States. Now housing is a capital good with fluid markets in the US, so one should see even less deviations. Yet they exist, in part due to large fluctuations in costs. There do not appear to be opportunities for additional profits: transaction costs are high, and fluctuations are impossible to predict. So there are no arbitrage opportunities, even if arbitrage appears to be rather slow.

No comments: