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Labour Income Uncertainty, Risk Aversion and Home Ownership

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  • Diaz-Serrano, Luis

    ()
    (Universitat Rovira i Virgili)

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    Abstract

    In this paper we investigate the effect of labour income uncertainty on the probability of homeownership in Germany and Spain. This study is motivated by two facts. Firstly, theoretical models tend to provide ambiguous results in this issue. Secondly, there is limited previous empirical evidence and the existing focuses exclusively on the US housing market. We claim that more international evidence is necessary in order to disentangle this puzzle. We develop a simple theoretical formula that highlights the pivotal role of risk attitudes in the housing tenure decisions that also allow us to introduce the concept of "skewness affection" as a relevant phenomenon. To carry out this test we propose an income uncertainty measure based on panel data labour income equations. We observe that households facing increasing income uncertainty display preference for renting while those located in a positively skewed income distribution show a greater propensity for homeownership. Income uncertainty analysis in housing decisions has important implications for the design of public housing policies and also for the design of private mortgage insurance products.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1008.

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    Length: 39 pages
    Date of creation: Feb 2004
    Date of revision:
    Publication status: published as 'Labor income uncertainty, skewness and homeownership: A panel data study for Germany and Spain ' in: Journal of Urban Economics, 2005, 58 (1), 156-176
    Handle: RePEc:iza:izadps:dp1008

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    Related research

    Keywords: credit constraints; earnings uncertainty; risk aversion; skewness affection; homeownership; transitory shocks in income;

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    References

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    1. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1039-61, November.
    2. Haurin Donald R. & Hendershott Patric H. & Kim Dongwook, 1994. "Housing Decisions of American Youth," Journal of Urban Economics, Elsevier, vol. 35(1), pages 28-45, January.
    3. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 98-113, March.
    4. Diaz-Serrano, L. & Hartog, J. & Skyt Nielsen, H., 2003. "Compensating Wage Differentials for Schooling Risk in Denmark," Economics, Finance and Accounting Department Working Paper Series, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth n1271003, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    6. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, Springer, vol. 28(3), pages 639-647, July.
    7. Diaz-Serrano, Luis & Hartog, Joop & Nielsen, Helena Skyt, 2003. "Compensating Wage Differentials for Schooling Risk in Denmark," IZA Discussion Papers 963, Institute for the Study of Labor (IZA).
    8. Haurin, Donald R. & Gill, H. Leroy, 1987. "Effects of income variability on the demand for owner-occupied housing," Journal of Urban Economics, Elsevier, vol. 22(2), pages 136-150, September.
    9. Chung, Eui-Chul & Haurin, Donald R., 2002. "Housing choices and uncertainty: the impact of stochastic events," Journal of Urban Economics, Elsevier, vol. 52(2), pages 193-216, September.
    10. Harvey S. Rosen & Kenneth T. Rosen & Douglas Holtz-Eakin, 1983. "Housing Tenure, Uncertainty, and Taxation," NBER Working Papers 1168, National Bureau of Economic Research, Inc.
    11. Robst, John & Deitz, Richard & McGoldrick, KimMarie, 1999. "Income variability, uncertainty and housing tenure choice1," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 29(2), pages 219-229, March.
    12. Irina Barakova & Raphael Bostic & Paul Calem & Susan Wachter, . "Does Credit Quality Matter for Homeownership?," Zell/Lurie Center Working Papers, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania 410, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    13. Ioannides, Yannis M., 1979. "Temporal risks and the tenure decision in housing markets," Economics Letters, Elsevier, Elsevier, vol. 4(3), pages 293-297.
    14. Gwilym Pryce & Margaret Keoghan, 2002. "Unemployment insurance for mortgage borrowers: is it viable and does it cover those most in need?," European Journal of Housing Policy, Taylor and Francis Journals, Taylor and Francis Journals, vol. 2(1), pages 87-114, April.
    15. Hartog, Joop & Vijverberg, Wim P., 2002. "Do Wages Really Compensate for Risk Aversion and Skewness Affection?," IZA Discussion Papers 426, Institute for the Study of Labor (IZA).
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    Cited by:
    1. Hideaki Tamura & Yoichi Matsubayashi, 2014. "A New Solution to the Equity Premium Puzzle and the Risk-Free Rate Puzzle: Theory and Evidence," Discussion Papers 1422, Graduate School of Economics, Kobe University.

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