Market Frictions, Arbitrage, and the Capitalization of Amenities

61 Pages Posted: 30 Apr 2019

See all articles by Amine Ouazad

Amine Ouazad

Rutgers Business School

Romain G. Rancière

University of Southern California

Multiple version iconThere are 2 versions of this paper

Date Written: April 2019


The price-amenity arbitrage is a cornerstone of spatial economics, as the response of land and house prices to shifts in the quality of local amenities and public goods is typically used to reveal households' willingness to pay for amenities. With informational, time, and cash constraints, households' ability to arbitrage across locations with different amenities (demographics, crime, education, housing) depends on their ability to compare locations and to finance the swap of houses. Arbitrageurs with deep pockets and better search and matching technology can take advantage of price dispersions and unexploited trade opportunities. We develop a disaggregated search and matching model of the housing market with endogenously bargained prices, identified on transaction-level data from the universe of deeds for 6,400+ neighborhoods of the Chicago metropolitan area, matched with school-level test scores and geocoded criminal offenses. Price-amenity gradients reflect preferences and the capitalization of trading opportunities, which are arbitraged away in the frictionless limit. Thus the time-variation in hedonic pricing coefficients partly reflects the time variation in search and credit frictions. Our model is able to explain that, between the peak of the housing boom and its trough, the sign of the price-amenity gradient flipped, due to the decline in trading opportunities in lower-amenity neighborhoods and due to the lower capitalization of trading opportunities in house prices.

Keywords: Dynamic Housing Choices, Limits of arbitrage, Market Friction, Mortgage Crisis, Pricing of Amenities

JEL Classification: G12, G21, R21, R3, R31

Suggested Citation

Ouazad, Amine and Rancière, Romain G., Market Frictions, Arbitrage, and the Capitalization of Amenities (April 2019). CEPR Discussion Paper No. DP13689, Available at SSRN:

Amine Ouazad (Contact Author)

Rutgers Business School ( email )

111 Washington Avenue
Newark, NJ 07102
United States

Romain G. Rancière

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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