The Multiplier of Public Expenditure on Justice : the Case of Rental Litigation

Bruno Deffains (University of Paris II Panthéon Assas)
Ludivine Roussey (University of Paris Ouest)

Abstract: This paper investigates the impact of the legal system on the rental housing market in France. We argue that when the eviction procedure is relatively formalized to protect tenants and when the resources allocated to the enforcement of rental contracts are limited, a ''rent-distrust spiral'' arises. To insure themselves against the default risk of tenants, landlords charge a high rent, thus inducing a lot of involuntary rent non-payments. Since courts have limited resources to deal with rental conflicts, they become congested, which reinforces the perceived risk associated with investing in a rental unit for landlords. They get more distrustful and charge an even higher rent, which causes even more difficult financial circumstances for tenants and make them more distrustful too. We propose to neutralize the perverse effects of a procedure protective towards tenants by slightly raising the resources allocated to the legal system. Our model shows that the positive externalities caused by the behavior of each agent trigger a multiplier effect which allows substantial positive changes in the rental housing market, especially a lower rent, fewer rental conflicts and more trustful individuals.

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