Contracting with Costly Tenants

This paper analyses rental contracts in the housing market assu-ming asymmetric information about tenant related `service cost' andimperfect mobility. On the positive side it explains why long standingtenants tend to enjoy lower rents |the so called `tenure discount'. Onthe normative side, it shows that the market equilibrium is not efficientbecause contracts protecting the tenant against arbitrary eviction suf-fer from adverse selection. Tenure security laws, therefore, have thepotential to improve welfare.