The New Economics of Equilibrium Sorting and its Transformational Role for Policy Evaluation

105 Pages Posted: 13 Sep 2010 Last revised: 5 Mar 2021

See all articles by Nicolai Kuminoff

Nicolai Kuminoff

Arizona State University (ASU) - Economics Department

V. Kerry Smith

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Christopher Timmins

Duke University - Department of Economics

Date Written: September 2010

Abstract

Households "sort" across neighborhoods according to their wealth and their preferences for public goods, social characteristics, and commuting opportunities. The aggregation of these individual choices in markets and in other institutions influences the supply of amenities and local public goods. Pollution, congestion, and the quality of public education are examples. Over the past decade, advances in economic models of this sorting process have led to new framework that promises to alter the ways we conceptualize the policy evaluation process in the future. These "equilibrium sorting" models use the properties of market equilibria, together with information on household behavior, to infer structural parameters that characterize preference heterogeneity. The results can be used to develop theoretically consistent predictions for the welfare implications of future policy changes. Analysis is not confined to marginal effects or a partial equilibrium setting. Nor is it limited to prices and quantities. Sorting models can integrate descriptions of how non-market goods are generated, estimate how they affect decision making and, in turn, predict how they will be affected by future policies targeting prices or quantities. Conversely, sorting models can predict how equilibrium prices and quantities will be affected by policies which target product quality, information, or amenities generated by the sorting process. These capabilities are just beginning to be understood and used in applied research. This survey article aims to synthesize the state of knowledge on equilibrium sorting, the new possibilities for policy analysis, and the conceptual and empirical challenges that define the frontiers of the literature.

Suggested Citation

Kuminoff, Nicolai and Smith, V. Kerry and Timmins, Christopher D., The New Economics of Equilibrium Sorting and its Transformational Role for Policy Evaluation (September 2010). NBER Working Paper No. w16349, Available at SSRN: https://ssrn.com/abstract=1674793

Nicolai Kuminoff (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

V. Kerry Smith

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher D. Timmins

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1809 (Phone)
919-684-8974 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
23
Abstract Views
478
PlumX Metrics