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The New Economics of Equilibrium Sorting and its Transformational Role for Policy Evaluation

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  • Nicolai V. Kuminoff
  • V. Kerry Smith
  • Christopher Timmins

Abstract

Households "sort" across neighborhoods according to their wealth and their preferences for public goods, social characteristics, and commuting opportunities. The aggregation of these individual choices in markets and in other institutions influences the supply of amenities and local public goods. Pollution, congestion, and the quality of public education are examples. Over the past decade, advances in economic models of this sorting process have led to new framework that promises to alter the ways we conceptualize the policy evaluation process in the future. These "equilibrium sorting" models use the properties of market equilibria, together with information on household behavior, to infer structural parameters that characterize preference heterogeneity. The results can be used to develop theoretically consistent predictions for the welfare implications of future policy changes. Analysis is not confined to marginal effects or a partial equilibrium setting. Nor is it limited to prices and quantities. Sorting models can integrate descriptions of how non-market goods are generated, estimate how they affect decision making and, in turn, predict how they will be affected by future policies targeting prices or quantities. Conversely, sorting models can predict how equilibrium prices and quantities will be affected by policies which target product quality, information, or amenities generated by the sorting process. These capabilities are just beginning to be understood and used in applied research. This survey article aims to synthesize the state of knowledge on equilibrium sorting, the new possibilities for policy analysis, and the conceptual and empirical challenges that define the frontiers of the literature.

Suggested Citation

  • Nicolai V. Kuminoff & V. Kerry Smith & Christopher Timmins, 2010. "The New Economics of Equilibrium Sorting and its Transformational Role for Policy Evaluation," NBER Working Papers 16349, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16349 Note: EEE
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    15. Binner, Amy & Day, Brett, 2015. "Exploring mortgage interest deduction reforms: An equilibrium sorting model with endogenous tenure choice," Journal of Public Economics, Elsevier, vol. 122(C), pages 40-54.
    16. Jeffrey Zabel, 2016. "A Dynamic Model of the Housing Market: The Role of Vacancies," The Journal of Real Estate Finance and Economics, Springer, vol. 53(3), pages 368-391, October.
    17. Mark D. Partridge & Dan S. Rickman, 2012. "Integrating Regional Economic Development Analysis and Land Use Economics," Economics Working Paper Series 1203, Oklahoma State University, Department of Economics and Legal Studies in Business.
    18. Nicolai V. Kuminoff & Jaren C. Pope, 2013. "The Value of Residential Land and Structures during the Great Housing Boom and Bust," Land Economics, University of Wisconsin Press, vol. 89(1), pages 1-29.
    19. Jacob Fishman & V. Kerry Smith, 2013. "A Direct Test of the "Explanation" for Incomplete Stratification in Vertical Sorting Models," NBER Working Papers 19387, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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