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Labour Income Uncertainty, Risk Aversion and Home Ownership

  • Diaz-Serrano, Luis

    ()

    (Universitat Rovira i Virgili)

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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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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  1. 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 n1271003, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  2. Irina Barakova & Raphael Bostic & Paul Calem & Susan Wachter, . "Does Credit Quality Matter for Homeownership?," Zell/Lurie Center Working Papers 410, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  3. Robst, John & Deitz, Richard & McGoldrick, KimMarie, 1999. "Income variability, uncertainty and housing tenure choice1," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 219-229, March.
  4. Ioannides, Yannis M., 1979. "Temporal risks and the tenure decision in housing markets," Economics Letters, Elsevier, vol. 4(3), pages 293-297.
  5. 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.
  6. 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, vol. 2(1), pages 87-114, April.
  7. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  8. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  9. 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).
  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. 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.
  12. 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.
  13. 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.
  14. Joop Hartog & Erik Plug & Luis Diaz Serrano & Jose Vieira, 2003. "Risk compensation in wages – a replication," Empirical Economics, Springer, vol. 28(3), pages 639-647, July.
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