Heterogeneity within Communities: A Stochastic Model with Tenure Choice

Abstract

Standard explanations for the observed income heterogeneity within US communities rely on heterogeneity of the housing stock and differences of preferences across households. We propose a dynamic stochastic model of location and tenure choice where homes are identical within locations and households initially differ according to income only. The model highlights how differences in the timing of moves generate income heterogeneity across homeowners, in particular within communities that experience strong positive demand shocks. Using US Census data, we provide evidence of the relevance of this income mixing mechanism. Our empirical findings suggest that incorporating information on time since moved and tenure choice may be useful in the estimation of equilibrium sorting models and of households' willingness to pay for local amenities, especially so in communities with a history of strong housing price growth.

Keywords: Equilibrium sorting, Income mixing, Housing demand,Tenure choice

JEL Classification: D31, R12, R21