On the Political Economy of Urban Growth: Homeownership Versus Affordability

34 Pages Posted: 9 Feb 2011

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)

Andrea Prat

Centre for Economic Policy Research (CEPR); Columbia Business School - Finance and Economics

Date Written: February 2011

Abstract

We study the equilibrium properties of an overlapping-generation economy where agents choose where to locate, and how much housing to own, and city residents vote on the number of new building permits every period. Under-supply of housing persists in equilibrium under conditions we characterize. City residents invest in housing because they expect their investment to be protected by a majority of voters opposed to urban growth. They vote against growth because they have invested in local housing. This vicious cycle between ownership and urban growth generates a tension between the common housing policy objectives of affordability for all and homeownership for most. Homeownership subsidies increase resistance to urban growth. Capturing the value of new building permits and distributing the proceeds to residents may move the economy away from a welfare-dominated no-growth equilibrium.

Keywords: housing, political economy, real estate

JEL Classification: R31

Suggested Citation

Ortalo-Magne, Francois and Prat, Andrea, On the Political Economy of Urban Growth: Homeownership Versus Affordability (February 2011). CEPR Discussion Paper No. DP8243. Available at SSRN: https://ssrn.com/abstract=1758454

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)
608-262-7867 (Fax)

HOME PAGE: http://francois.marginalq.com

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

Poschinger Str. 5
Munich, DE-81679
Germany

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

Andrea Prat

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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