Helen Yang
Perhaps a better question to ask is why websites like Craigslist do not work well in China. True, we have a number of apartment rental websites, such as 58 Tongcheng (58 同城）, Ganji （赶集网） , Soufun（搜房网）, etc. But all these websites direct renters to some local rental agents rather than real landlords. The information on the ads is not reliable. It's a common practice for rental agents to put up photos of the most attractive but unavailable apartments online. After you see the beautiful photos and low rent in the ads, you call the agents and they will tell you that these apartments are not available. They invite you to see other apartments, but it usually turns out that those are more expensive or less appealing. To rent an apartment via an agent, the landlord and the tenant have to jointly pay a commission fee to the agent which amounts to a full month's rent. In Beijing, this amount is fully borne by the tenant. In Xiamen, the landlord and the tenant split the commission fee equally.
What is the incentive of a typical rental agent? On the one hand, rental agents screen landlords to get the most accurate information of their apartments. On the other hand, they deliberately distort the information online to increase the number of phone calls from potential renters. The objective function of the rental agents regarding their advertising strategy is to maximize the possibility of meeting potential renters. In fact, the ads on rental websites are not for the apartments, but for the rental agents themselves. There is fierce competition among rental agents, since one landlord would usually contract with multiple agents. Sometimes the landlords and the tenants try to bypass the rental agents after the deal is made to avoid the commission fee. Therefore, rental agents are cautious about the contact between the landlord and the tenant. For example, rental agents would require landlords to move out before potential renters come to look at the properties.
Perhaps a better question to ask is why websites like Craigslist do not work well in China. True, we have a number of apartment rental websites, such as 58 Tongcheng (58 同城）, Ganji （赶集网） , Soufun（搜房网）, etc. But all these websites direct renters to some local rental agents rather than real landlords. The information on the ads is not reliable. It's a common practice for rental agents to put up photos of the most attractive but unavailable apartments online. After you see the beautiful photos and low rent in the ads, you call the agents and they will tell you that these apartments are not available. They invite you to see other apartments, but it usually turns out that those are more expensive or less appealing. To rent an apartment via an agent, the landlord and the tenant have to jointly pay a commission fee to the agent which amounts to a full month's rent. In Beijing, this amount is fully borne by the tenant. In Xiamen, the landlord and the tenant split the commission fee equally.
What is the incentive of a typical rental agent? On the one hand, rental agents screen landlords to get the most accurate information of their apartments. On the other hand, they deliberately distort the information online to increase the number of phone calls from potential renters. The objective function of the rental agents regarding their advertising strategy is to maximize the possibility of meeting potential renters. In fact, the ads on rental websites are not for the apartments, but for the rental agents themselves. There is fierce competition among rental agents, since one landlord would usually contract with multiple agents. Sometimes the landlords and the tenants try to bypass the rental agents after the deal is made to avoid the commission fee. Therefore, rental agents are cautious about the contact between the landlord and the tenant. For example, rental agents would require landlords to move out before potential renters come to look at the properties.
Given the same bundle of technologies, why does China end up with a more costly method to organize the rental market than the U.S.? Apparently the transaction costs of renting an apartment in China is much higher. Using Craigslist, the searching cost is low. You may respond that is people cannot tell which information from the landlords is true without the mediation of rental agents. Renters may end up meeting a bad guy instead of a landlord after seeing a spam. At least rental agents hired by real estate companies are more reliable than some anonymous landlords online. On the other side, landlords are also afraid of dealing with criminals instead of good tenants. Since background checks are extremely costly in China, it would be more desirable to contract with rental agents and let agents find out the background information for both parties. Compared with internet technologies, human beings have a comparative advantage in identifying fraud and spams. The skills of rental agents in screening landlords and tenants are valuable in a society that lacks trust.
This problem reminds me of a recent paper written by Avner Greif and Guido Tabellini: The Clan and the City: Sustaining Cooperation in China and Europe. The authors argue that "Thus, the European system has a comparative advantage in supporting impersonal exchange, while the Chinese system has a comparative advantage in economic activities in which personal relations are more efficient." The reason for such divergence, they believe, is that "In China, clans became the locus of cooperation among kin motivated by limited morality and informal institutions. In Europe, cities became the locus of cooperation among non-kin motivated by generalized morality and formal institutions...The institutional embeddedness of these social groups further reinforced their organizational forms and moralities in multiple ways that our parsimonious model does not capture. These effects persist today." Whether they are correct or not, at least, I can confirm that in traditional China, middlemen in rental market were almost indispensable . （See this article in Chinese: The Function of Middlemen in Rental Disputes in the Qing Dynasty)
How can we test their hypothesis? Maybe we can use today's Chinese data to compare regions dominated by powerful clans with regions that have few clans to see if the function of middlemen is similarly important in contractual relations.
This problem reminds me of a recent paper written by Avner Greif and Guido Tabellini: The Clan and the City: Sustaining Cooperation in China and Europe. The authors argue that "Thus, the European system has a comparative advantage in supporting impersonal exchange, while the Chinese system has a comparative advantage in economic activities in which personal relations are more efficient." The reason for such divergence, they believe, is that "In China, clans became the locus of cooperation among kin motivated by limited morality and informal institutions. In Europe, cities became the locus of cooperation among non-kin motivated by generalized morality and formal institutions...The institutional embeddedness of these social groups further reinforced their organizational forms and moralities in multiple ways that our parsimonious model does not capture. These effects persist today." Whether they are correct or not, at least, I can confirm that in traditional China, middlemen in rental market were almost indispensable . （See this article in Chinese: The Function of Middlemen in Rental Disputes in the Qing Dynasty)
How can we test their hypothesis? Maybe we can use today's Chinese data to compare regions dominated by powerful clans with regions that have few clans to see if the function of middlemen is similarly important in contractual relations.
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