Owner-occupied housing as an investment, regional house price cycles and residential sorting

We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupied household’s location choice depends on its current wealth and its current type and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the type (wealth). The model predicts a negative relation between the size of house price fluctuations and the degree of residential sorting in the type dimension. Also, movers should be more sorted than stayers in the type dimension. These predictions are consistent with evidence from US metropolitan areas when income, education and age are used as proxies for household type.residential sorting; house prices; consumption motive; investment motive; incomplete markets; household mobility

The Political Economy of Sin Taxes

We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under reasonable assumptions, the socially optimal corrective tax exceeds the average distortion caused by self-control problems. Further, we analyse how individuals with self-control problems would vote on taxes on the consumption of harmful goods, and show that the equilibrium tax is typically below the socially optimal level. When the redistributive effects of sin taxes are taken into account, the difference between the social optimum and equilibrium is small at low levels of harm, but becomes more pronounced when consumption is more harmful.excise taxation, voting, self-control

Housing Markets, Liquidity Constraints and Labour Mobility

Recent European data indicate that countries where a large proportion of the population lives in owner-occupied housing are experiencing higher unemployment rates than countries where the majority of people live in private rental housing, which might suggest that rental housing enhances labor mobility. In this paper, we develop a simple intertemporal two-region model that allows us to compare owner-occupied housing markets to rental markets and to analyze how these alternative arrangements allocate people in space and time. Consistent with the empirical observations, we find that the interregional labor market is more fluid under rental housing than under owner-occupation. As a result of greater mobility, the rental arrangement also results in better allocational efficiency than owner-occupation. When dwellings are rented, the decision to move to a booming region is largely based on current productivity, whereas under owner-occupation random wealth effects encourage deviations from this optimal behavior.labour mobility; liquidity constraints; owner-occupation; rental housing

House Price Fluctuations and Residential Sorting

Empirical evidence indicates local jurisdictions are internally more heterogeneous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household's location choice depends on its current wealth and its current ``match'' and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the match (wealth). The model predicts a negative relation between the size of house price fluctuations and residential sorting in the match dimension. Also, movers should be more sorted than stayers. These predictions are consistent with evidence from US metropolitan areas when income, age and education are used as proxies for the match.residential sorting, house prices, incomplete markets, owner-occupation, household mobility

House price fluctuations and residential sorting

Empirical evidence suggests that local jurisdictions are internally more heterogeneous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household’s location choice depends on its current wealth and its current ‘match’ and involves both consumption and investment considerations. The relative weights of the consumption and investment motives in the location choice determine the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to match (wealth). The model predicts a negative relation between size of house price fluctuations and residential sorting in the match dimension. Also movers should be more sorted than stayers. These predictions are consistent with evidence from US metropolitan areas when income, age and education are used as proxies for the match.residential sorting; house prices; incomplete markets; owner-occupation; household mobility

Housing Markets in a Simple Pure Consumption Economy

This paper studies different housing market arrangements in an intertemporal pure consumption economy, consisting of a desirable and an undesirable housing location. Economic agents are heterogenous with respect to the utility premium they derive from living in the desirable location. This utility premium, or match, is drawn independently in every period, and also the popularity ranking of the loca-tions may be reversed between periods. Under owner-occupation, the opportunity cost of living in a desirable location takes the form of random capital losses, and for-gone capital gains. The rental arrangement corresponds to owner-occupation, with capital gains and losses taking place with probability one. We show that under the rental arrangement the agents have strong incentives to choose their location according to the current match, while under owner-occupation these incentives are weaker, and borrowing constraints play a larger role in clearing the housing market. We demonstrate that there is more residential mobility under rental markets than under owner-occupied housing. According to a utilitarian social welfare criterion, the rental arrangement outperforms owner-occupation

The Political Economy of Sin Taxes

We analyse the determination of taxes on harmful goods when consumers have self-control problems. We show that under mild conditions, the socially optimal tax rate exceeds the average distortion caused by self-control problems. Further, we show that in most cases the tax rate chosen in political equilibrium is below the socially optimal level