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Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortions on Housing Prices?

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  • Carlos Medina

    ()

  • Leonardo Morales

    ()

Abstract

Domiciliary public utility services in Colombia have a cross subsidy system which charges subsidized rates to the households who live in houses located in strata associated to low wealth levels, and taxed rates to the better off. We assesses the hypothesis that the flow of subsidies that potentially come from a particular house, are discounted by housing market agents so that most of them are transferred to the prices of the houses that generate the subsidies. By estimating a hedonic prices model applying a regression discontinuity approach, we find that the increment in house value estimated because of subsidies is similar in magnitude to the present value of the flow of subsidies. Likely effects are found on the rent amount. We conclude that subsidies to the poor population through public spending in domiciliary public utility services in Colombia is being achieved, if anything, in a very limited way. Most of the financial effort on this subject ends up distorting housing relative prices according to socioeconomic strata, with an annual cost of up to 0.7% of GDP in supposed gross subsidies to domiciliary public utility services.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 422.

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Handle: RePEc:bdr:borrec:422

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Keywords: targeting of subsidies; Incidence; stratification; segregation; hedonic price models; regression discontinuity design. Classification JEL: C0; D31; H4; H22; H24; I3;

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  1. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  2. Cutler, David M & Glaeser, Edward L, 1997. "Are Ghettos Good or Bad?," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 827-72, August.
  3. Sandra E. Black, 1997. "Do better schools matter? Parental valuation of elementary education," Research Paper 9729, Federal Reserve Bank of New York.
  4. Oates, Wallace E, 1969. "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 957-71, Nov./Dec..
  5. Michael Kremer, 1996. "How Much Does Sorting Increase Inequality?," NBER Working Papers 5566, National Bureau of Economic Research, Inc.
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Cited by:
  1. Alejandro Gaviria & Carlos Medina & Leonardo Morales & Jairo Nuñez, . "The Cost of Avoiding Crime: The Case of Bogotá," Borradores de Economia 508, Banco de la Republica de Colombia.
  2. Carlos Medina & Leonardo Morales & Jairo Nuñez, 2008. "Quality of Life in Urban Neighborhoods in Colombia:The Cases of Bogotá and Medellín," BORRADORES DE ECONOMIA 005126, BANCO DE LA REPÚBLICA.
  3. Shaun McRae, 2009. "Infrastructure Quality and the Subsidy Trap," Discussion Papers 09-017, Stanford Institute for Economic Policy Research, revised Nov 2009.
  4. Leonardo Morales, 2013. "Peers Effects on a Fertility Decision: an Application for Medellín Colombia," Borradores de Economia 777, Banco de la Republica de Colombia.
  5. Carlos Medina & Leonardo Fabio Morales, 2007. "Demanda por Servicios Públicos Domiciliarios en Colombia y Subsidios: Implicaciones sobre el Bienestar," BORRADORES DE ECONOMIA 004293, BANCO DE LA REPÚBLICA.
  6. Medina Carlos & Leonardo Morales, 2008. "Demanda por servicios públicos domiciliarios y pérdida irrecuperable de los subsidios: el caso colombiano," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.

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