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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

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  • 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.

Suggested Citation

  • Carlos Medina & Leonardo Morales, 2006. "Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortions on Housing Prices?," Borradores de Economia 422, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:422
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    References listed on IDEAS

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    1. Maddock, Rodney & Castano, Elkin & Vella, Frank, 1992. "Estimating Electricity Demand: The Cost of Linearising the Budget Constraint," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 350-354, May.
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    3. Michael Kremer, 1997. "How Much does Sorting Increase Inequality?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 115-139.
    4. David M. Cutler & Edward L. Glaeser, 1997. "Are Ghettos Good or Bad?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 827-872.
    5. 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 957-971, Nov./Dec..
    6. P. C. Cheshire & E. S. Mills (ed.), 1999. "Handbook of Regional and Urban Economics," Handbook of Regional and Urban Economics, Elsevier, edition 1, volume 3, number 3.
    7. 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..
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    Cited by:

    1. 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.
    2. Shaun McRae, 2015. "Infrastructure Quality and the Subsidy Trap," American Economic Review, American Economic Association, vol. 105(1), pages 35-66, January.
    3. 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.
    4. Leonardo Fabio Morales, 2015. "Peer Effects on a Fertility Decision: an Application for Medellín, Colombia," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 119-159, February.
    5. repec:gam:jsusta:v:10:y:2018:i:5:p:1599-:d:146710 is not listed on IDEAS
    6. Alejandro Gaviria & Carlos Medina & Leonardo Morales & Jairo Núñez, 2010. "The Cost of Avoiding Crime: The Case of Bogotá," NBER Chapters,in: The Economics of Crime: Lessons for and from Latin America, pages 101-132 National Bureau of Economic Research, Inc.
    7. Alejandro Gaviria & Carlos Medina & Leonardo Morales & Jairo Nuñez, 2008. "The Cost of Avoiding Crime: The Case of Bogotá," Borradores de Economia 508, Banco de la Republica de Colombia.
    8. Camila Casas, 2014. "Subsidies to Electricity Consumption and Housing Demand in Bogotá," Borradores de Economia 847, Banco de la Republica de Colombia.
    9. 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, February.

    More about this item

    Keywords

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

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H4 - Public Economics - - Publicly Provided Goods
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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