Capitalization and Community Size
Posted: 12 Sep 2003
Studies often show taxes and public services capitalized into house prices, but no one has tested whether the rate of capitalization depends on community size. The theoretical model of Hoyt (Regional Science and Urban Economics, 29, 155-171, 1999) predicts that capitalization occurs, but that the rate of capitalization is weaker in large communities. Hoyt's model is tested empirically using a house price hedonic framework. The tax capitalization results are less clear, but the school quality and crime results firmly support the model's predictions. Using both school districts and municipalities to measure communities, larger communities weaken the rate of capitalization.
Keywords: capitalization, market power, price of housing, hedonic, local public goods
JEL Classification: H40, H21, R31, R21
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