Learning about the Neighborhood

Zhenyu Gao, Michael Sockin and Wei Xiong

The Review of Financial Studies, 2021, vol. 34, issue 9, 4323-4372

Abstract: We develop a model to analyze information aggregation and learning in housing markets. Households enter a neighborhood by buying houses and consuming each other’s final goods. In the presence of pervasive informational frictions, housing prices serve as important signals to households and capital producers about the neighborhood’s economic strength. Our model provides a novel amplification mechanism in which noise from housing markets propagates throughout the local economy via learning because of the complementarity in households’ decisions, distorting migration into the neighborhood and the supply of capital and labor. We provide consistent evidence based on the recent U.S. housing cycle.

JEL-codes: D83 D84 R21 R23 R31 (search for similar items in EconPapers)
Date: 2021
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