City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects

Amine Ouazad () and Romain Ranciere

No 23994, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a general equilibrium model of location choice with social interactions where mortgage approval rates determine household-specific choice sets that differ across neighborhoods and years in observable and unobservable dimensions. Existence and local uniqueness of city equilibria enable comparative statics estimates of the impact of changes in borrowing constraints on neighborhood-level prices and demographics. Estimation the model using micro data on property transactions, household demographics, neighborhood amenities, mortgage applications, and bank liquidity for the San Francisco Bay area, reveals that the price sensitivity of borrowing constraints explains about two-thirds of the price elasticity of neighborhood demand. General equilibrium estimates of the impact of the relaxation of lending standards on prices and neighborhood demographics bring two out-of-sample predictions for the period 2000-2006: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites in line with evidence of gentrification in the San Francisco Bay. Both predictions are supported by empirical observation.

JEL-codes: G21 R21 R31 R51 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-ure
Note: CF IFM PE POL
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Published as Amine Ouazad & Romain Rancière, 2019. "City Equilibrium With Borrowing Constraints: Structural Estimation And General Equilibrium Effects," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(2), pages 721-749, May.
Published as Amine Ouazad & Romain Rancière, 2019. "CITY EQUILIBRIUM WITH BORROWING CONSTRAINTS: STRUCTURAL ESTIMATION AND GENERAL EQUILIBRIUM EFFECTS," International Economic Review, vol 60(2), pages 721-749.

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