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Home Ownership, Local Interactions and Segregation

  • Karla Hoff

    (World Bank)

  • Arijit Sen

    (Indian Statistical Institute)

There is substantial evidence that home-ownership changes behavior and creates local spillovers. But theoretical research on the decision to own or rent a home has ignored such spillovers and does not confront the issue of the determination of the quality and composition of neighborhoods. This paper constructs a simple theory that can explain the quality and composition of a community as the outcome of the decisions of all households in a metropolitan area, taking into account the general equilibrium effects that are inherent in the problem. We study a model with spillovers, in which the appreciation of the price of a home depends on the investments that other community residents make in their homes. We assume that capital markets are imperfect, so that it is more costly for a low-income household to purchase a home than for a high-income household to do so. We obtain two main results. First, there may be multiple, Pareto-ranked equilibria in the fraction of homeowners in a community; hence, any housing policy analysis has to recognize the problem of co-ordination failure. Second, we establish condition under which market forces will lead home-owners and renters to live in separate communities. We show that even if the poor do not have different preferences for housing than the rich and even if they internalize externalities no less than the rich do, under plausible conditions rich and poor households may live in communities that exhibit very different social characteristics- -the rich in a community with high levels of home-ownership and high levels of civic engagement, and the poor in a community with low levels of both. The model provides a framework for studying the effects on community quality of changes in the distribution of income and changes in policy towards home-ownership.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0952.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0952
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  1. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  2. Ioannides, Yannis M., 2002. "Residential neighborhood effects," Regional Science and Urban Economics, Elsevier, vol. 32(2), pages 145-165, March.
  3. Denise DiPasquale & Edward L. Glaeser, 1998. "Incentives and Social Capital: Are Homeowners Better Citizens?," NBER Working Papers 6363, National Bureau of Economic Research, Inc.
  4. Legros, Patrick & Newman, Andrew F., 1996. "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory, Elsevier, vol. 70(2), pages 312-341, August.
  5. J. Vernon Henderson & Ari Kuncoro & Matthew Turner, 1992. "Industrial Development in Cities," NBER Working Papers 4178, National Bureau of Economic Research, Inc.
  6. Schall, Lawrence D, 1976. "Urban Renewal Policy and Economic Efficiency," American Economic Review, American Economic Association, vol. 66(4), pages 612-28, September.
  7. Rosen, Harvey S., 1985. "Housing subsidies: Effects on housing decisions, efficiency, and equity," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 7, pages 375-420 Elsevier.
  8. Andrew Caplin & Sewin Chan & Charles Freeman & Joseph Tracy, 1997. "Housing Partnerships: A New Approach to a Market at a Crossroads," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032430, June.
  9. Benabou, Roland, 1993. "Workings of a City: Location, Education, and Production," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 619-52, August.
  10. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  11. Palfrey, Thomas R. & Rosenthal, Howard, 1984. "Participation and the provision of discrete public goods: a strategic analysis," Journal of Public Economics, Elsevier, vol. 24(2), pages 171-193, July.
  12. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
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