Equilibrium Limited Liability Contracts in a Landlord-Tenant Market

• Authors: David Pérez-Castrillo.
• BSE Working Paper: 112203 | September 15
• Keywords: moral hazard , limited liability , endogenous matching , optimal contracts
• JEL codes: C78, D82, O12
• moral hazard
• limited liability
• endogenous matching
• optimal contracts

We propose a model based on competitive markets in order to analyse an economy with several homogeneous landlords and heterogeneous tenants. We model the landlord- tenant economy as a two-sided matching game and characterise the equilibrium of this market. In equilibrium, contracts are Pareto optimal, and the incremental surplus generated in a landlord-tenant relationship accrues to the tenant. We also suggest policy measures in relation to efficiency and income distribution.