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Structural Demand Estimation
With Borrowing Constraints

67 Pages Posted: 16 Jun 2016  

Amine Ouazad

HEC Montréal

Romain G. Rancière

Paris School of Economics (PSE); International Monetary Fund (IMF)

Date Written: June 10, 2016

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 better performing 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 Rancière, Romain G., Structural Demand Estimation With Borrowing Constraints (June 10, 2016). USC-INET Research Paper No. 16-18. Available at SSRN: https://ssrn.com/abstract=2796228

Amine Ouazad (Contact Author)

HEC Montréal ( email )

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

Romain G. Rancière

Paris School of Economics (PSE) ( email )

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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