Entanglement between Demand and Supply in Markets with Bandwagon Goods

Whenever customers' choices (e.g. to buy or not a given good) depend on others choices (cases coined 'positive externalities' or 'bandwagon effect' in the economic literature), the demand may be multiply valued: for a same posted price, there is either a small number of buyers, or a large one -- in which case one says that the customers coordinate. This leads to a dilemma for the seller: should he sell at a high price, targeting a small number of buyers, or at low price targeting a large number of buyers? In this paper we show that the interaction between demand and supply is even more complex than expected, leading to what we call the curse of coordination: the pricing strategy for the seller which aimed at maximizing his profit corresponds to posting a price which, not only assumes that the customers will coordinate, but also lies very near the critical price value at which such high demand no more exists. This is obtained by the detailed mathematical analysis of a particular model formally related to the Random Field Ising Model and to a model introduced in social sciences by T C Schelling in the 70's.Comment: Updated version, accepted for publication, Journal of Statistical Physics, online Dec 201

Mobility-Tenure Decisions and Financial Credit: Do Mortgage Qualification Requirements Constrain Homeownership?

Housing analysts have generally assumed that mortgage qualification requirements significantly constrain homownership, however there has been no empirical evidence of this effect. By explicitly modeling and estimating the impact of mortgage qualification requirements on households' mobility and tenure decisions, this paper provides the first empirical evidence of the effect of these criteria on homeownership. The estimation results suggest that in 1986, mortgage qualification criteria did not provide a large constraint on homeownership. However, they also show that the impact of these criteria increases as the flow costs of owning decrease relative to those of renting. This implies that the nationwide significance of these constraints will vary with fluctuations in the macro economy, and that policies designed to limit the effect of these requirements will be more successful in economic environments favorable to homeownership. Copyright American Real Estate and Urban Economics Association.

The Investment in Housing As a Forward Market Transaction: Implications for Tenure Choice and Portfolio Selection

A model of tenure choice is presented which treats the benefits and costs of homeownership from a theory of finance perspective. The incremental benefits from homeownership over renting housing services are from two sources: protection against rental price risk (a forward transaction in the housing market) and from a possible capital gain from the eventual sale of a house (substitutes for portfolio investment). The cost of these benefits is higher initial outlay on housing, which reduces the funds available for portfolio investments. The comparative statics of this model is presented. It is shown that rental risk and portfolio risk add to the value of homeownership. Since homeownership is a partial substitute for portfolio investment, it is shown that the lower the covariance between portfolio returns and future home prices the more valuable is homeownership. In the presence of differential borrowing opportunities it is shown that the leverage available to housing significantly increases the value of homeownership. Copyright American Real Estate and Urban Economics Association.

Financial liberalization and short-run housing price dynamics

Housing price dynamics, Financial liberalization,