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Monopoly in Real Life - The Housing Market, Finance and Inequality

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  • Baur, Dirk

Abstract

This paper uses a simple model based on the board game Monopoly to analyze the drivers of house prices and wealth inequality. Simulations show that inequality generally builds up fast even if players have equal starting conditions and house prices are stable; rising house prices imply more extreme inequality. An extension of the classical game with interest rates and debt-financing further shows that low interest rates facilitate a property carry trade and increase house prices and inequality by more than high interest rates. The simulations also demonstrate a first-mover advantage both within a generation and between generations and the non-exogenous nature of wealth accumulation, i.e. without new money owing into the housing market, house prices do not go up and wealth differences are less extreme. Overall, despite the model's simplicity it presents striking similarities with empirical evidence.

Suggested Citation

  • Baur, Dirk, 2019. "Monopoly in Real Life - The Housing Market, Finance and Inequality," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203547, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc19:203547
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    References listed on IDEAS

    as
    1. Katharina Knoll & Moritz Schularick & Thomas Steger, 2017. "No Price Like Home: Global House Prices, 1870-2012," American Economic Review, American Economic Association, vol. 107(2), pages 331-353, February.
    2. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(3), pages 1255-1310.
    3. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "The great mortgaging: housing finance, crises and business cycles," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(85), pages 107-152.
    4. Moritz Schularick & Alan Taylor & Oscar Jorda, 2016. "The Great Mortgaging," 2016 Meeting Papers 185, Society for Economic Dynamics.
    5. Gunther Schnabl, 2016. "Central Banking and Crisis Management from the Perspective of Austrian Business Cycle Theory," CESifo Working Paper Series 6179, CESifo.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    house prices; debt; inequality; monetary policy; board game Monopoly; Cantillon effect; Ponzi scheme;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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