Do Urban Neighborhoods Benefit from Homeowners? Evidence from Housing Prices

Mika Kortelainen and Tuukka Saarimaa

Scandinavian Journal of Economics, 2015, vol. 117, issue 1, 28-56

Abstract: Homeownership is heavily subsidized in most countries. The adverse effects of this policy on economic efficiency and income distribution are well documented in the economics literature. The main argument in favor of subsidizing homeownership is that it creates positive externalities that offset these adverse effects. In this paper, we test whether homeowners create positive externalities that capitalize into housing prices in multi-storey buildings. Using semi-parametric hedonic regressions with and without instrumental variables, we find no evidence of positive externalities, although the results with instrumental variables are somewhat imprecise. This result is robust to several sensitivity checks and to a relaxation of the identification assumptions of our instrument using set identification.

Date: 2015
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