Heterogeneity within Communities: A Stochastic Model with Tenure Choice

Francois Ortalo-Magne and Sven Rady

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: Standard explanations for the income heterogeneity within neighborhoods rely on differences of preferences across households and heterogeneity of the housing stock. We propose an alternative and complementary explanation. We construct a stochastic equilibrium sorting model where (1) income is the sole dimension of household heterogeneity, (2) households form state-contingent housing location plans that may involve moves over their lifetimes, (3) households choose whether to own or rent depending on the housing expenditure risk associated with each tenure mode, and (4) there is a probability that newcomer households move in and compete for homes with native households. Income mixing within neighborhood arises for two reasons. First, allowing natives to form state-contingent housing location plans breaks the indivisibility of housing consumption implicit in the literature where households choose their location once and for all. Second, natives can insure themselves against rent fluctuations by buying their home prior to the realization of the population shock; newcomers cannot. As a result, poorer natives stay in the more desirable communities and only richer newcomers move in these communities. Evidence from U.S. metropolitan areas supports the effects predicted by the model.

Keywords: Equilibrium Sorting; Income Mixing; Housing Demand; Tenure Choice (search for similar items in EconPapers)
JEL-codes: D31 R12 R21 (search for similar items in EconPapers)
Date: 2005-05
New Economics Papers: this item is included in nep-dge, nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Heterogeneity within communities: A stochastic model with tenure choice (2008)
Working Paper: Heterogeneity within Communities: A Stochastic Model with Tenure Choice (2005)
Working Paper: Heterogeneity within Communities: A Stochastic Model with Tenure Choice (2005)
Working Paper: Heterogeneity within Communities: A Stochastic Model with Tenure Choice (2005)
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