More Rent Transparency Could Have Positive Impact On Policy

Moving is no fun. I’ve posted here before that what is often called a “housing crisis” is part of the friction and disutility of having to move a household from one place to another. A feature of this is the cost; hiring people to help, filing applications, paying a deposit, or putting up a down payment. When it comes to rental housing, monthly rent is a serious pain point. Think about it, for many households, housing costs are about a third of total gross pre-tax income. Writing a monthly rent check isn’t just annoying but can be a real challenge. And many often grow to resent it up to the point of believing it isn’t fair to have to pay rent at all. This can lead to calls for rent control, a regime that just doesn’t work. What if housing costs were more transparent, especially to renters?

I stumbled upon a working paper from the Harvard Business School called, Lifting the Veil: The Benefits of Cost Transparency, a study about how being truthful about how much it costs to produce something effects consumers. The study discussed in the paper defines cost transparency as “the disclosure of the costs to produce a good or provide a service.” The paper’s abstract is refreshingly straightforward,

“Building on the psychology of disclosure and trust, we posit that cost transparency, insofar as it represents an act of sensitive disclosure, fosters trust. In turn, this heightened trust enhances consumers’ willingness to purchase from that firm. In support of this account, we present six studies, conducted in the field and in the lab. A pre-registered field experiment indicated that diners were 21.1% more likely to buy a bowl of chicken noodle soup when a sign revealing its ingredients also included the cafeteria’s costs to make it. Five subsequent online experiments replicated and extended this basic effect, providing evidence of when and why it occurs. Taken together, these studies imply that the proactive revelation of costs can improve a firm’s bottom line.”

How did the study group demonstrate this? There’s a great example in the study of a wallet seller that had five different colors of wallet. The manufacture intended to include cost information for all of them in marketing materials but mistakenly only included information for three of the colors. The result was a natural experiment. A review of the sales data found that there was a 22% increase in the sales of the “treated” wallets. Treated is a statistical term referring to the items receiving an intervention. The study team used a differences-in-differences approach to controlling for other factors that might have influenced the outcome. They were satisfied that, indeed, sharing cost information makes people more likely to buy a product.

Well, let’s assume that’s true. All things being equal, people are more likely to buy a product that explains the costs behind the price. But are they happier to pay for the product? The study sites a raft of literature about Kayak.com, a travel search service that hunts down travel bargains. People like the operational transparency of Kayak: “the site discloses in real-time which airlines it is searching.” The study team suggest that operational transparency is different from cost transparency and from price transparency, the breakdown of price components. “Price transparency and price partitioning have both been found to increase purchase intentions.”

The study doesn’t get to a “happiness” question or whether transparency ameliorates resentment at having to pay a large some for a necessity. But the study is thought provoking. So much of what people resent about rent or housing costs has to do with the perception about profits or greed. The study argues that, “if, as we posit, a firm’s voluntary revelation of its costs increases trust, then it should increase purchase interest both when prices are surprisingly high as well as when prices are surprisingly low.”

Interestingly, just last July a website called Rent, offering it says, “innovative solutions that connect renters with apartment communities they’ll love,” published an article titled, “Here’s why fee transparency is the key to converting renters: What property teams need to know to convert more renters.” The article is about a survey that validates the Harvard working paper, finding that, based on renter responses, “providing clarity around costs is an effective way to build trust with prospects.” And the article points out that such disclosures are “also becoming a requirement in emerging local legislation. For example, Minnesota’s 2024 landlord-tenant law requires greater transparency in rent, fees, and utilities.”

Could more disclosure blunt the demands for rent control and other regulatory interventions? It would be worth taking a closer look at the feelings people have about the outcome of such revelations. I am curious but skeptical. Housing is very different than other commodities in that it has no substitute. Households can reduce consumption or find other options when prices go up or earnings go down. Would knowing how much household rent check covers property taxes and governmental regulation change the views of renters? It is possible. What should happen is more and closer evaluation of disclosure regulation asking this question.