Heterogeneity within Communities: A Stochastic Model with Tenure Choice

Posted: 6 Feb 2008 Last revised: 9 Apr 2009

See all articles by François Ortalo-Magné

François Ortalo-Magné

Wisconsin School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Sven Rady

University of Bonn

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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

Suggested Citation

Ortalo-Magne, Francois and Rady, Sven, Heterogeneity within Communities: A Stochastic Model with Tenure Choice. Journal of Urban Economics 64 (2008) 1-17. Available at SSRN: https://ssrn.com/abstract=1089863

Francois Ortalo-Magne (Contact Author)

Wisconsin School of Business ( email )

4300 Grainger Hall
975 University Avenue
Madison, WI 53706-1323
United States
608-262-7867 (Phone)
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HOME PAGE: http://francois.marginalq.com

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Sven Rady

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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