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8/21/2004

Warranties of Habitability

Via Yglesias. Law and Economics (L&E) has a thirty year track record of ignoring its critics. Alex Taborrak at George Mason University is the latest in this distinguished tradition (also here and here), using a poorly chosen example to demonstrate the economic "truth" that warranties of habitability cause rent increases. His syllabus doesn't inspire confidence that he will ever address these criticisms.

Taborrak's argument is that a warranty of habitability will always cause rent to increase:

If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it's no longer obvious if tenants benefit or if landlords are harmed.
Other bloggers, many genuine economists, have already criticized this argument. Economist Atrios notes that eliminating information collection and dispute settling costs increases the efficiency of the regulations. Kimmitt similarly critiques the argument because of the "enormous transactions costs associated with having non-uniform codes in this area." Daniel at Crooked Timber notes the bargaining advantage held by landlords. Brian, also at Crooked Timber, anecdotally notes that costs aren't necessarily reflected in prices, even in fairly competitive environments. Kevin Drum notes that it is wrong to assume that Taborrak's point delegitimates much regulation.

All of these objections are important, and all undermine the actual significance of Taborrak's point. But none actually meet it head on or challenges its three central assumptions: 1. Warranties of habitability result in rent increases; 2 Warranties of habitability reduce the supply of affordable housing; and 3. Warranties of habitability result in inefficiencies. Taborrak's argument is that those who specifically want to contract for cheaper rents at the expense of habitability will be injured by the inalienability of the warranties. The liberal/left blogger criticism repeats the patterns of what Law Professor Mark Kelman identifies as a failing in liberal/left political thought:
[P]rogressive students have been reasonably well prepared to manipulate the more cogent forms of radically oppositional rhetoric (especially in relationship to issues of gender and race), as long as the specific controversies at bar do not touch on the regulation of the economy. They are most comfortable in their progressive mode when the particular controversy involves the appropriate allocation of material or symbolic goods by some centralized distributing agency (the state, the university) whose duty to allocate the particular goods, rather than to allow them to be allocated through noncompulsory trading, is not in question. Thus, for instance, I see fully self-confident "progressive" political talk concerning the duty to establish multicultural curricula: The university will surely maintain, without extensive controversy, the legal privilege to allocate mandatory courses however it resolves the issue of which courses should be mandatory. Similarly, progressives can confidently urge an expansion of the appropriate reach of rape law knowing that the state must unquestionably define when sex is adequately consensual and uncoerced.

At the same time, progressive students are almost invariably far less self-assured when defending a variety of interventions in the private economy, that sector in which valued goods or entitlements are not allocated by a central body whose legitimate authority to make some allocative decision is largely unquestioned. Nearly all extol the minimum wage, or warranties of habitability, or rent control, but far fewer can explain their support in detail, because the "analytical" economics material to which they have been exposed permits them only to understand that such interventions will either be worthless or harmful to their purported beneficiaries.

Progressive students may recognize, however unselfconsciously, that they have the rhetorical upper hand only when an issue is conceived of as involving the allocation of goods by legitimate central allocators, rather than the regulation of the economy. Thus, for instance, it is easier for progressive students to defend comparable worth as a purely political battle among organized groups (one of which is subordinated) for either explicit state largesse or purely symbolic, nonprogrammatic affirmation, than as a wage-correcting intervention in the labor market. Progressive students are thus far more comfortable arguing the abstract point that "women's work" is "devalued" (symbolically, nonprogrammatically) than arguing for any particular regulation of the labor market that alters the relative wages of jobs statistically dominated by women and those dominated by men. Similarly, when students here at Stanford defend East Palo Alto's rent control ordinance, they more typically emphasize the community's rights to political self-determination and control of its demographic future than the impact of the statute (or such statutes generally) on housing affordability and availability. Those who have "learned" their social science lessons have "learned" that rent control misallocates housing and dampens long-term construction, just as they have "learned" that minimum wage laws cause disemployment of black teenagers or that compulsory overtime pay statutes block optimal trades between workers and employers. In general, these progressive students have learned to back away from prudential balancing - and "policy" more generally - in favor of rights-based approaches. This is not because they have adopted anti-utilitarian ethics more generally, or because they explicitly worry about treating incommensurable interests as simple commodities, but rather because they fear (I fear) that the prudent and the "politically correct" won't often coincide.
Mark Kelman, Progressive Vacuums, 48 Stan. L. Rev. 975 (1996).

Taborrak's arguments have been challenged head on though, in much legal literature, including in some of the seminal texts in the development of modern landlord-tenant law.

Argument 1. The first point, on the impact of warranties of habitability on rents, was discussed by Bruce Ackerman in his incredibly influential 1971 article, Regulating Slum Housing Markets, 80 Yale LJ 1093 (1971). Ackerman's argument is too lengthy to be done justice here, but it is basically that if one assumes that landlords in areas where people might prefer lower rents in exchange for lack of code enforcement (in "Slumville") are unable to attract new tenants into Slumville, they will not be able to pass onto the remaining tenants the cost of code maintenance. Those renters who are unwilling to pay the higher rents will find alternative living arrangements, increasing vacancies and driving prices back down. So long as the rate of return remains profitable and there is an adequate number of renters unwilling to pay higher rents, rents will not rise significantly in "slumvilles." Ackerman proposes subsidies to ensure that too many properties aren't taken off the market.

Ackerman's argument is solid, given his assumptions, but I believe it was Komesar who noted that it's redistributive effect could be better achieved by taxing landlords and redistributing to renters. Ackerman played a big part in
Judge Skelly Wright's
decisions that established the basis for modern landlord-tenant law.

Argument 2. The second point, on the reduction in housing supply caused by reduced returns, is a contestable empirical question. Law Professor Duncan Kennedy, in writing about the idea of "milking," explains a scenario in which warranties of habitability could actually increase the housing supply:
My argument is as follows: According to the "filtering model" of low income housing supply, poor people are likely to live in neighborhoods where building values are declining, even when housing conditions are improving. Under conventional neo-classical microeconomic assumptions, we would expect landlords to undermaintain, or "milk," buildings in declining slum neighborhoods. The degree of undermaintenance is theoretically indeterminate. Enforcing a code or warranty should prevent it, prolong building life, and increase housing supply. Contrary to the conclusions of "mainstream" analysis, the effect of comprehensive code or warranty enforcement on the price and quantity of slum housing is therefore indeterminate. Selective enforcement could increase supply more than it decreases it, and depress rent levels for the poor. Institutional conditions make it likely that slum landlords will sometimes seriously rather than trivially undermaintain, and that neighborhood effects will amplify individual landlord decisions into large scale trends.
Duncan Kennedy, 15 Fla. St. U.L. Rev. 485 (1987). His argument is that shrinkage often occurs in the housing supply when landlords opt to let properties peter off into non-habitability by "milking" properties off for maximum short term return at the expense of maintenance costs necessary for long term sustenance. By prohibiting this sort of activity, forced maintenance of property actually has the effect of increasing the supply of housing stock.

Argument 3. This assertion, that inefficiencies are created by the regulation, is the most contested. Taborrak argues that a renter values something at $X if he is willing to pay that much for it, while a landlord values something at $Y, the cost of implementation. Applying the hard Coase theorem, we can assume that $Y will be greater than $X, or else the renter would have already paid for the improvement himself. Requiring the improvement would produce an inefficiency equal to the difference between $X and $Y, somehow divided between the landlord and renter.

As a first rebuttal to this, look to the offer/ask problem, which has been explored in great detail in behavioral economics literature. An individual's valuation of a good is not static; among other things, it depends on the initial allocation of goods. I like to read the hypothetical NBA trade proposals at www/realgm.com; it is astonishing how much more fans of a team value their players relative to fans of other teams. So assume that the renter has a contractual warranty of habitability. The landlord comes back to him and asks how much he would have to pay the renter to give up his right to the warranty. Is there any reason to believe that it will be the same $X as above? The only reason that we were able to assume that $X from above is lower than $Y from above is because of the hard Coasean observation that it must be, or else things would be different. But if the initial allocation is different, that assumption doesn't hold.

People tend to want much higher compensation for a reduction in utility than they are willing to pay for a similar increase. A renter might be willing to pay $100 for hot water in his apartment. But he might want a reduction in rent of $200 for to let the landlord take that hot water away. If the cost to the landlord of the hot water is $150, the efficiency of a regulation requiring hot water is ambiguous. In analyzing the efficiency effects of a transaction, one can't simply rely on a "willingness to pay" standard.

Conclusion. The orthodox economic explanation of the effect of a non-waiveable warranty of habitability is not as clear as Taborrak makes it out to be. There are defendable assumptions that undercut, and indeed reverse the direction, of the tendencies he identifies. Teaching the orthodox explanation without reference to its critics does a disservice to his students. Moreover, using a unitary understanding of efficiency is not intellectually defensible.

 

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