Structural Demand Estimation with Borrowing Constraints

66 Pages Posted: 2 Oct 2015 Last revised: 29 Feb 2016

Amine Ouazad

HEC Montréal

Romain Ranciere

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: October 30, 2015

Abstract

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

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

Amine Ouazad (Contact Author)

HEC Montréal ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

Romain Ranciere

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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