CITY EQUILIBRIUM WITH BORROWING CONSTRAINTS: STRUCTURAL ESTIMATION AND GENERAL EQUILIBRIUM EFFECTS

Amine Ouazad () and Romain Ranciere

International Economic Review, 2019, vol. 60, issue 2, 721-749

Abstract: This article develops a general equilibrium model of location choice where mortgage approval rates determine household‐specific choice sets. Estimation of the model using San Francisco Bay area data reveals that the price sensitivity of borrowing constraints explains about two‐thirds of the price elasticity of neighborhood demand. General equilibrium analysis of the 2000–2006 relaxation of lending standards predicts the following impacts on prices and neighborhood demographics: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites reflecting gentrification. Both predictions are supported by empirical observation.

Date: 2019
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https://doi.org/10.1111/iere.12366

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Working Paper: City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects (2017)
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