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Do Homeowners Benefit Urban Neighborhoods? Evidence from Housing Prices

  • Mika Kortelainen
  • Tuukka Saarimaa

Homeownership is heavily subsidized in many countries mainly through the tax code. The adverse effects of lenient tax treatment of owner-occupied housing on economic efficiency and growth are large and well documented in the economics literature. The main argument in favor of subsidizing owner-occupied housing is that it creates positive externalities that offset these adverse effects. This paper tests whether homeowners create positive externalities to their immediate neighborhood that capitalize into housing prices in multi-storey buildings. Using semiparametric hedonic regressions with and without instrumental variables we find no evidence of positive externalities from neighborhood homeownership rate. This result is robust to relaxing the identification assumptions of our instrument using a recently developed set identification method. Our results suggest that the adverse efficiency effects of lenient tax treatment of owner-occupied housing are not offset by positive externalities.

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Paper provided by Spatial Economics Research Centre, LSE in its series SERC Discussion Papers with number 0110.

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Date of creation: May 2012
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Handle: RePEc:cep:sercdp:0110
Contact details of provider: Web page: http://www.spatialeconomics.ac.uk/SERC/publications/default.asp

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