Anecdotal evidence suggests that bribery is a common means of obtaining rent-controlled apartments. Increased tenant maintenance is a less often noted, but potentially important, phenomenon in controlled markets. Previous empirical studies of the effects of rent control have neglected these side payments, presumably for lack of data. This paper presents evidence on their size and incidence for the controlled market of Cairo, Egypt, as well as estimates of effects such side payments have on welfare gains and losses from controls. Anecdotal evidence suggests that bribery is a common means of obtaining rent controlled apartments. Increased tenant maintenance is a less often noted, but potentially important, phenomenon associated with controls. Previous empirical studies of the effects of rent control have neglected these side payments, presumably for lack of data. Cairo, Egypt is a market with enforced controls on monthly rent, but where side payments, including key money, are often paid. Cairo can thus be viewed as a ‘‘natural experiment’’ for the study of controls in general and the effects of side payments in particular. This study uses a model developed by Schwab (1985) to estimate the effects such side payments have on welfare gains and losses from controls, and is to my knowledge the only study to include key money and other side payments in such estimation. 2 Cairo is, of course, the capital and largest city of the Arab Republic of Egypt. About 10 million of Egypt’s total population of over 50 million live in the metropolitan area. Moreover, Cairo’s population is increasing rapidly, although the rate of increase is declining. Since 1970 Cairo’s population has been growing at about 2 to 2.5% per annum, down from 4% in the 1950s.

Rent control was introduced in Cairo in 1944. Controls were applied only to houses built before 1944, in order to avoid discouraging housing production. Major changes in the law took place gradually between the start of the Egyptian revolution in 1952, and 1965. During this period rent controls were extended to cover newer units, and rents set previously were further reduced until by 1962 controls were extended to new construction as well as the existing stock. In the late 1970s, legal rents per annum were set at 8% of the assessed value of the land, plus 5% of the assessed construction cost of the structure. Actual costs were used for new units, and estimated construction costs for units built before that date. Just before the primary data collection for this study was completed in 1981, 3 a new housing law was promulgated. The law fixed the legal rate of return at 7% of the combined value of the land and cost of construction of the structure. Luxury and furnished units are exempt from controls, but the number of such units is strictly controlled, so rents for these units exceed their production costs. In practice, furnished (and therefore uncontrolled) units are rented mainly to foreigners.