Heterogeneity within Communities: A Stochastic Model with Tenure Choice

35 Pages Posted: 4 Jun 2005

See all articles by Sven Rady

Sven Rady

University of Bonn

François Ortalo-Magné

Wisconsin School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

Standard explanations for the observed income heterogeneity within communities rely on differences of preferences across households and heterogeneity of the housing stock. We propose a dynamic stochastic model of location choice where households differ according to income only, and homes are identical within locations. Households choose whether to own or rent their home motivated by concerns over housing expenditure risk. The model highlights how differences in the timing of moves generate income heterogeneity across homeowners within neighborhoods, in particular in cities that experience strong positive demand shocks. US Census data provides evidence in favor of the income mixing mechanism we identify. In communities that have experienced strong price growth, the heterogeneity of homeowners' incomes is positively correlated with the heterogeneity of the times since they bought their homes. Homeowners who moved in more recently earn higher incomes than homeowners who bought earlier, more so in cities with strong housing price growth. These relationships do not hold for renters.

JEL Classification: D31, R12, R21

Suggested Citation

Rady, Sven and Ortalo-Magne, Francois, Heterogeneity within Communities: A Stochastic Model with Tenure Choice (May 2005). CESifo Working Paper No. 1465. Available at SSRN: https://ssrn.com/abstract=730405

Sven Rady (Contact Author)

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Francois Ortalo-Magne

Wisconsin School of Business ( email )

4300 Grainger Hall
975 University Avenue
Madison, WI 53706-1323
United States
608-262-7867 (Phone)
608-262-7867 (Fax)

HOME PAGE: http://francois.marginalq.com

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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