The Effect of Second Generation Rent Controls: New Evidence from Catalonia


Catalonia enacted a second-generation rental cap policy in late September 2020. The policy affected some municipalities but not others and, within the former, the policy only affected the units with prices above the “reference” price. Using microdata on rental units, we analyze the effect of the policy on both rental prices and the composition of rental supply. As intended, the policy led to a reduction in rental prices of approximately 5%. The policy also led to a convergence of prices toward the reference price, a decline in the overall supply of rental units, and to a significant shift in the composition of units available in the market. We argue that the evidence can be understood through the lenses of a directed search model. The model rationalizes the empirical facts. It also predicts that reference prices solve search frictions inefficiencies, but lead to a decline in welfare of tenants in “low-price” units and a welfare improvement of tenants in “high-price” units.