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Heterogeneity within Communities: A Stochastic Model with Tenure Choice


(by François Ortalo-Magné, with Sven Rady)
Journal of Urban Economics, Volume 64, Issue1, July 2008, Pages 1-17

Standard explanations for the observed income heterogeneity within US communities rely on heterogeneity of the housing stock and differences of preferences across households. We propose a dynamic stochastic model of location and tenure choice where homes are identical within locations and households initially differ according to income only. The model highlights how differences in the timing of moves generate income heterogeneity across homeowners, in particular within communities that experience strong positive demand shocks. Using US Census data, we provide evidence of the relevance of this income mixing mechanism. Our empirical findings suggest that incorporating information on time since moved and tenure choice may be useful in the estimation of equilibrium sorting models and of households' willingness to pay for local amenities, especially so in communities with a history of strong housing price growth.

JEL classification
D31; R12; R21

Equilibrium sorting; Income mixing; Housing demand; Tenure choice
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