66 Pages Posted: 2 Oct 2015 Last revised: 29 Feb 2016
Date Written: October 30, 2015
Structural models of location choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households’ choice set. Credit availability differs across locations, households, and years. We put forward a model of neighborhood choice where mortgage approval rates determine households’ choice set. Using household-level data, geocoded transactions, and mortgage applications for the San Francisco Bay area, we find that including borrowing constraints leads to higher estimated preferences for schools and majority-white neighborhoods. General equilibrium estimates of the relaxation of lending standards provide two out-of-sample predictions: between 2000 and 2006, (i) a compression of the price distribution and (ii) a decline in black exposure to Whites. Both predictions are supported by empirical observation.
Keywords: Location Choice, Industrial Organization, Urban Economics, Credit Constraints, Differentiated Products, Segregation
JEL Classification: R21, R23, G21
Suggested Citation: Suggested Citation
Ouazad, Amine and Ranciere, Romain, Structural Demand Estimation with Borrowing Constraints (October 30, 2015). INSEAD Working Paper No. 2015/89/EPS. Available at SSRN: https://ssrn.com/abstract=2668195 or http://dx.doi.org/10.2139/ssrn.2668195