Thursday, June 16, 2011

Gambling with the Rent

The working poor take a gamble on reduced rent: People who rent their homes and regularly lose at gambling seek smaller homes, allocating a significant portion p% of their losses to reduced demand for rental housing space.  People who rent their homes and suddenly win at gambling cannot seek to rent a larger home, since the winnings are not constant.  Therefore, they allocate much less than p% of their winnings to an increased demand for rental housing space.  Therefore, the gamblers as a whole demand less rental housing space and shift that demand to something else -- presumably consumption and investments.  Furthermore, many gamblers who win big will buy their homes or pay their mortgages or in other ways stop being a person who works, earns stable income, and pays a significant portion of that income in housing rent. 

Rental housing prices fluctuate more than most goods available to working renters.  Suppose working renters as a class allocate 10% of their income to gambling in one country, whereas they do not gamble in another country, where they pay r% of their income in rent.  The working gamblers earn W when they don't gamble; their landlords earn r% of W.  Where gambling occurs, the landlords earn r% of 90% of W, which equals r% of W minus p% of 10% of W.  This implies that p = r, which is consistent with the fact that r balances your marginal preference for a slightly larger apartment with your preference for other expenditures, whereas p balances your marginal preference for a smaller apartment with your preference to cut back on other expenses.  Working renters who demand 10% less beer will get 10% less beer.  But working renters who demand 10% less apartment space may find that landlords are not willing to leave too many apartments vacant.  The inflexibly large supply of rental apartments will cause the price of renting to fall until the renters are willing to take all the existing apartments (minus those which the landlords are willing to leave vacant) at the price which the renters are willing to pay.  The renters may end up paying 10% less for 2% less space.  That ratio 8%/10% -- when working renters pay 10% less in total, they get 8% more space for free -- measures the "inelasticity of the housing market."  We'll write n% for the "inelastic generosity" of landlords, it might be 80% in the short-term. 

Landlords subsidize gambling:

Thus, paradoxically, the working poor could spend a portion of their income gambling, reduce all their expenses, including reducing the price they pay monthly for housing, and it's about 80% true that their landlords will let them keep their apartments and pay the same rent.

Do winners win, or only the lottery?

We suppose that the biggest impact of gambling is to transfer wealth from losing gamblers to winning gamblers.  The remainder -- salaries, casinos and other infrastructure, taxes, charitable donations and profits, or whatever governments and lotteries buy with their money --  should be relatively small.  The transfer of wealth between losers and winners decreases demand for those products which losing gamblers buy and increases demand for those products which gamblers buy after they win.  Losing gamblers consume less, but consumption markets can simply contract.  But so far we have not considered the economic impact of winners.  Working renters will apparently see their losses reduced by their landlords (who pay only r% times n% of the losses -- maybe 30% times 80% or just under a fourth -- but who can complain about receiving a fourth of their losses back?) regardless of how they lose their money.

Landlord generosity, an example.

Rental markets for working people are investments in fixed resources -- for this market to contract, housing prices would have to fall to the point where some renters would buy their apartments outright.  But falling prices for small apartments and falling rents are the same thing.  If the number of apartments does not contract  (that is, if the landlords are all unwilling to leave any apartments empty in order to drive up prices), then n% is 100% -- the price of rent falls until the renters can again afford it.  Perhaps the landlords can changing the renters' preference p% for apartments over other goods and services slightly, but probably not by the entire value of the renters' loss of income.  One could imagine gamblers a,b,c,...z who rent houses A,B,C...Z, where the houses are ranked from the nicest to the worst.  If all the gamblers loose, they should all spend less on their housing.  gambler z moves out into the street; gambler y moves to apartment Z, and so on, leaving apartment A free. One gambler has won; gambler g moves out of the apartments all together.  Gambler g might rent apartment A (which is now vacant) or might buy (it).  The fact that one apartment now stands empty forces rents down until gamblers a,b,c,d,e,f,h...z move back into apartments B...Z, at lower rent.  In fact, if rent is the only fixed resource which the renters are consuming, then all their other consumption decreases should be met by contractions in those markets, causing all those prices to be fixed.  Only their rent will diminish, and their rents should be lowered by exactly r% of their gambling losses.

Economic rent:

It may seem unfair to the landlords that they pay for someone else's gambling habits, and pay at 80% !  Of course, if the landlords were collecting only the value of the stream of services provided by an apartment (those services including shelter, safety, rest, showers, space to cook and eat hot meals, etc.) then they would charge an inflexible price -- below this price, it is cheaper to them to leave the house vacant than to let you grind dirt into the nice floors, cause fire hazards with your candles, shoot up the place, burn the furniture, drive wheelbarrows through the hedges and operate a meth lab in the bathroom or whatever else turns your fancy but runs down an apartment.  The price of an apartment would equal the expected costs of upkeep, plus some interest on the investments (the furniture in a furnished apartment, in addition to the cost of upkeep, cost the landlord the chance to invest elsewhere, so the landlord very reasonably expects to get a return on that investment).  But, in addition, there is some "economic rent" earned by those with deeds to municipal property because land in a city is scarce, and since cities are profitable.  The fact that the city has become more profitable is information that the landlord only learns when commercial and housing rental prices per square meter rise.  It seems, from what I read in economics, that the price of rent includes economic rent on very valuable municipal property.  Economic theorists have proposed that a city which increases its property tax and decreases its income tax would free the marketplace of some inefficiencies (caused by income tax, but not caused by property tax, basically because income tax operates "at the margin" where it kills all transactions which would be marginally efficient without it).

Differential rent:  Do landlords capture workers' expected profits?

Suppose you get a job offer in a faraway city.  You could go there, rent an apartment, and do the job.  Or you could stay somewhere where you are already welcome, rent-free, and you could find the best job available there.  Perhaps your parents are tolerant, or perhaps you have exceptionally supportive siblings.  The expected profit from each choice has a certain profit, where profit is winnings minus expenses:

Take the job in the city: Profits are income minus taxes, pension, transportation, food...
Write your book: Profits are expected sales minus taxes and some contribution to your benefactor's budget.

If the landlords are the only ones in this story who own any fixed resource, then by a law of economics (that all profits go to someone who has a fixed resource) the profits accrue to the landlords.  The total rent extracted from each worker then should be that worker's expected profits in the city versus staying home, where profits are income minus whatever expenses are so dear to the worker that he would rather pay them than move out of his hovel.

Here we suppose that the economic rent on a worker's unique and personal abilities is one reason the worker earns profit (income above opportunity cost); the economic rent on land, which is another scarce resource, is the reason that landlords earn profit, and that if the landlords control access to the city labor market, their profits should be differential rent -- the profit you get working a city job minus the profit you get by writing your book.  The landlord extracts this differential rent by renting squares of land and cubes of air at a fairly constant price, but by varying the quality, so that the squares available in cheaper apartments are of such a terrible quality that no one who can afford a better place will dare to switch to a worse place.  Do they succeed in extracting differential rent?  If you never consider moving to a smaller apartment, but you do sometimes consider moving away from the city and writing your book, then perhaps they are succeeding in restricting your choices to the differential. 

What do winners buy?

It would seem that renters gambling causes a flow of money from slumlords to high-end landlords: everyone who loses loses a little and all rents diminish.  The winners invest some money, which drives up the value of fixed investments, such as property.  The winners consume some high-end products.
The market for these products expands.  This increases the demand for services and materials, increasing wages and paying the owners of natural resources.  I have argued for the utility of gambling and then investing your money, so I hope that winners buy investments, as did this investing lottery winner.


If landlords reimburse the working renters for their collective gambling, it will have been noticed that gambling depresses rental prices.  Studying the economics of gambling and residential property is complicated, however.  The most direct effect of making-gambling-legal seems to be the rise in high-end property values.  This might be completely driven by the development of large casinos.  Perhaps we need to look not at Las Vegas but at Oregon or the effect on the economy when home games of poker became popular. 

The article _Early impacts of limited stakes casino gambling_ by PT Long, 1996, states: "Although not true in all of the gambling communities, residential property in Black Hawk and Central City has experienced a substantial decline..." while a newspaper report on Macau property reports the rise of high-end property values through the story of an individual company: "Instead of casinos, the partners launched an opportunity fund in 2006 to invest in high-end residential, retail and commercial property in Macau to capitalise on the boom in gambling...  Riding on the back of the gambling boom in Macau, the value of the five assets owned by the trust rose..." and the Financial Times reported: in its article _Asia-Pacific - Macao tries to cool housing market_ on 29 Sep 2010 that "While gaming revenue rose rapidly, however, so did house prices. Residential property prices in Macao have increased almost a third..." and an academic review of the effects of gambling reports higher property values, without mentioning whether they are high-end or low-end, but mentions only business property: "higher property values lead to higher property taxes, which may make it more difficult for small business renters (though not necessarily for property owners)... Obviously, an increase in property values (and hence taxes) puts a squeeze on some operators, especially renters (property owning restauranteurs, even if they went out of business, reaped the gains of these property value increases), and again this is more a matter of distributional than aggregate impacts."  The obvious truth that casinos bring jobs, which increase rental prices is brought home by this commentary: A new industry like casino gaming may have jobs and increased income associated with it. These amenities will induce an increase in property values. 

Are economic rents lower in home-rental prices in gambling towns?

Consistent with these predictions, I checked rental prices in ZIP Codes with similar populations, similar population density, and similar distance to the center of a city of half a million people -- finding
cities of a similar size and general population density , finding similar postcodes in those cities, and
using a rent calculator to find prices.  The ratio of the average price for a rental house to the average home property value is lower in suburban Las Vegas than it is in Portland, which is lower than it is in Denver.

Zip codes: 89109 (Nevada) 97220 (Oregon) 80121 (Colorado)
Price per square meter for a 1BR house: 0.96, 1.07, 1.10
Price per square meter for a 2BR house: 0.86, 0.90, 1.02
Price per square meter for a 3BR house: 0.76, 0.90, 0.99
Price per square meter for a 4BR house: 0.71, 0.78, 0.81

I'm assuming that working renters in Las Vegas will gamble more than working renters in Portland, who will gamble more than working renters in Denver.  And while these cities have the same size in population, there are lots of differences between Las Vegas, Portland, and Denver other than a presumption that the working renters gamble more in one place.

Gambling for your class.

Widespread gambling makes a poor worker less profitable, but their rents would drop by a comparable amount.  The few who win large sums and invest them and earn interest might stay in the city -- and compete for apartment space with those who earn high profits -- or might move home and collect dividends on their gambling wins without paying rent at all.  They no longer compete with the rest of their peers to rent apartments of the same quality as they have been renting.  Those who win small prizes can consume these small prizes and enjoy them, without worrying that those small prizes will be confiscated as rent.  This is perhaps the best part of the scheme: while your losses do decrease your rent, your winnings do not increase your rent, because if you can't predict it, neither can your landlord.

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