The purpose of this paper is to determine whether restricting contractual freedom in the rental housing market is an effective mechanism to maximize social welfare. For this, the author analyzes the most significant measures enacted by the Spanish government in March 2019 and discusses their potential long- term effects. The examinations are based on principles of economic theory and empirical evidence from literature. Contractual regulation is shown to directly cause undersupply of rental housing ...
The purpose of this paper is to determine whether restricting contractual freedom in the rental housing market is an effective mechanism to maximize social welfare. For this, the author analyzes the most significant measures enacted by the Spanish government in March 2019 and discusses their potential long- term effects. The examinations are based on principles of economic theory and empirical evidence from literature. Contractual regulation is shown to directly cause undersupply of rental housing and upward pressure to prices. Additionally, low-income tenants, who are more likely to have a precarious work and spend a larger proportion of their disposable income on housing, appear to be the most severely affected because lessors cannot effectively hedge against the higher risk this type of lessee entails. Indirect effects, such as inefficient allocation of resources, suboptimal labor mobility and discrimination of tenants are also discussed. It is found that contractual freedom, legal certainty, ease of construction and judicial efficiency are the key drivers for an efficient rental housing market, which maximizes social welfare.
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