Research

Does a landlord's property tax bill affect a new tenant's rent? According to standard economic theory, it should not—the law of one price implies that identical rental units in the same market should be priced identically, despite heterogeneity in property tax costs. This paper provides new evidence that a landlord's property tax bill does affect rent for new tenants, violating the law of one price. I investigate the effect of heterogeneous property tax shocks on rents using a unique, quasi-experimental setting in California. California's Proposition 13 creates large discrepancies in property tax liability among otherwise similar rental units, and these discrepancies are exacerbated quasi-randomly around a sale. Using a novel, comprehensive dataset on new tenant rents from the City of Berkeley, I find strong evidence that landlords faced with quasi-random, building-level property tax shocks pass through $0.50-$0.89 per $1 of the property tax shock to renters. The results are robust to the inclusion of landlord size, renovations around a sale, and a property's purchase price. I propose and empirically motivate an explanatory model of heterogeneity in landlord sophistication that can rationalize the observed positive relationship between rent and property taxes.

This paper investigates behavioral responses to an increase in taxation of inherited property in California. Using data from San Francisco and Los Angeles counties, we find that households accelerated inter-vivos property transfers to their children by 15 months in response to an impending tax increase on inherited property. We disaggregate responses by Census tract income and find that the top income decile in each county is most responsive to the policy change. Our tax elasticity estimates are much larger than what is typically found in the inheritance tax literature, and imply a significant delay in expected government revenue and an exacerbation of inequality in tax liabilities due to the policy change.

Housing is the largest component of the CPI, yet how landlords adjust contract rents remains poorly understood. Using 25 years of administrative data from Berkeley, California and the nationally representative American Housing Survey, we document five facts about rental price dynamics. First, new-tenant rents exhibit state-dependent downward nominal rigidity: although 13% of leases reset at exactly the previous tenant’s rent, the missing mass of rent cuts arises only in expansions and largely disappears in downturns. Second, both the frequency and size of rent changes move with market conditions, unlike most non-housing CPI components. Third, rents display strong seasonality comparable to the home purchase market. Fourth, rents cluster at round numbers and just below them, reflecting coarse pricing, left-digit bias, and misoptimization by landlords. Round-number clustering intensifies when rent growth is unpredictable, revealing a novel cognitive cost of inflation. Fifth, larger landlords adjust rents more aggressively in response to the business cycle, with implications for shelter inflation volatility. Our estimates provide new moments for sticky-price models and highlight the role of behavioral frictions and firm heterogeneity in inflation dynamics.