Does housing allowances raise rents? - A literature review from Finnish rental market

Abstract

This paper studies the impact of housing allowances on rents. I answer on questions "do housing allowance recipients pay higher rents?" and "do housing allowance increase overall rent levels?". The paper is a literature review focusing on the most notable studies of the subject and researches the questions from the standpoint of the Finnish rental market. The topic is difficult to research due to the econometric problems, mostly of simultaneous causality and omitted variable bias. That, among other reasons, causes the results to contradict. Kangasharju (2003 & 2010) finds that housing allowance recipients pay roughly 12% or 60-70% higher rents, respectively. Virén (2013) concludes that one-third of housing allowances to shift overall prices. Lastly, Eerola & Lyytikäinen (2019) finds no evidence of higher rent for housing allowance recipients. Foreign studies seem to be as contradictive. I conclude in this paper due to the setting, methods, and high robustness that Eerola & Lyytikäinen's (2019) result is the most plausible. I also conclude that the effect on overall rents is not researched enough to quantify the impact, but it is most likely positive.