City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects

60 Pages Posted: 6 Nov 2017

See all articles by Amine Ouazad

Amine Ouazad

HEC Montréal

Romain G. Rancière

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

This paper develops a general equilibrium model of location choice with social interactions where mortgage approval rates determine household-specific choice sets that differ across neighborhoods and years in observable and unobservable dimensions. Existence and local uniqueness of city equilibria enable comparative statics estimates of the impact of changes in borrowing constraints on neighborhood-level prices and demographics. Estimation the model using micro data on property transactions, household demographics, neighborhood amenities, mortgage applications, and bank liquidity for the San Francisco Bay area, reveals that the price sensitivity of borrowing constraints explains about two-thirds of the price elasticity of neighborhood demand. General equilibrium estimates of the impact of the relaxation of lending standards on prices and neighborhood demographics bring two out-of-sample predictions for the period 2000-2006: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites in line with evidence of gentrification in the San Francisco Bay. Both predictions are supported by empirical observation.

Suggested Citation

Ouazad, Amine and Rancière, Romain G., City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects (November 2017). NBER Working Paper No. w23994. Available at SSRN: https://ssrn.com/abstract=3065805

Amine Ouazad (Contact Author)

HEC Montréal ( email )

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

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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