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Love Thy Neighbor: Income Distribution and Housing Preferences

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  • Tin Cheuk Leung

    (The Chinese University of Hong Kong)

  • Kwok Ping Tsang

    (Virginia Tech and Hong Kong Institute for Monetary Research)

Abstract

Do homeowners prefer living in an area with a more equal distribution of income? We answer this question by estimating a semi-parametric hedonic pricing model for about 90,000 housing units transacted in Hong Kong between 2005 and 2006. We first identify a hedonic price function by locally regressing the rental price of the housing unit on its intrinsic and neighborhood characteristics, one of which is the Gini coefficient for household income of the constituency area. We then combine the estimates with a log utility function to obtain the heterogeneous preference parameters. Finally, we estimate the joint distribution of the preference parameters and demographics. We find that most homeowners have a strong distaste for inequality in their neighborhood, and the distaste increases with income and goes down with education level. Counterfactual experiments show that reallocating Public Rental Housing by half can increase the welfare of homeowners by about HK$8,000 on average per year, an amount which is equivalent to increasing the housing unit by 20 square feet or reducing the age of the unit by 5 years.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 372011.

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Length: 32 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:hkm:wpaper:372011

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Keywords: Hedonic Pricing; Housing; Income Inequality;

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References

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  1. Charles Ka Yui Leung & Sinan Sarpca & Kuzey Yilmaz, 2012. "Public Housing Units vs. Housing Vouchers: Accessibility, Local Public Goods, and Welfare," RCER Working Papers 574, University of Rochester - Center for Economic Research (RCER).
  2. Alberto Alesina & Reza Baqir & William Easterly, 1999. "Public Goods And Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1243-1284, November.
  3. Yannis M. Ioannides & Jeffrey E. Zabel, 2000. "Neighborhood Effects and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0012, Department of Economics, Tufts University.
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  5. Yannis M. Ioannides, 1999. "Residential Neighborhood Effects," Discussion Papers Series, Department of Economics, Tufts University 9912, Department of Economics, Tufts University.
  6. Epple, Dennis & Platt, Glenn J., 1998. "Equilibrium and Local Redistribution in an Urban Economy when Households Differ in both Preferences and Incomes," Journal of Urban Economics, Elsevier, vol. 43(1), pages 23-51, January.
  7. Charles Ka-Yui Leung & Youngman Chun Fai Leong & Siu Kei Wong, 2005. "Housing Price Dispersion: An Empirical Investigation," Departmental Working Papers _167, Chinese University of Hong Kong, Department of Economics.
  8. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2007. "A Unified Framework for Measuring Preferences for Schools and Neighborhoods," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 588-638, 08.
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  15. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 513-548, December.
  16. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  17. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  18. Yannis Ioannides, 2001. "Neighborhood Income Distributions," Discussion Papers Series, Department of Economics, Tufts University 0103, Department of Economics, Tufts University.
  19. Kiel, Katherine A. & Zabel, Jeffrey E., 2008. "Location, location, location: The 3L Approach to house price determination," Journal of Housing Economics, Elsevier, vol. 17(2), pages 175-190, June.
  20. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
  21. C. Lanier Benkard & Patrick Bajari, 2005. "Hedonic Price Indexes With Unobserved Product Characteristics, and Application to Personal Computers," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 61-75, January.
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