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Real Rents and Household Formation: The Effect of the 1986 Tax Reform Act

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  • Donald R. Haurin
  • Patric H. Hendershott
  • Dongwook Kim

Abstract

Although the economic literature has analyzed some components of the headship decision, study of household formation has been primarily in the realm of demography. We begin with a pure demographic model and expand it to include additional determinants of the decision to remain with parents or not, to marry or not, and to live with a group or separately. Our results, based on a sample of 2355 youth in their twenties, indicate that (1) rental costs, wealth, and the potential wage that a youth could earn are important variables in explaining the outcomes of these choices am (2) including the economic variables significantly changes the estimated impacts of the demographic variables. One insight that the expanded economic model allows is the prediction that some public policies will affect headship rates of youth. This prediction is of interest because choices of living arranqements often have implications for demands upon public services and housing. We use as an example the 1986 Tax Reform Act and focus on a single outcome: the expectation of higher rental costs. If rentals rise by 20 percent, as predicted by some tax analysts, we estimate a half million reduction in the number of 1986 households formed by youth ages 21 to 29.

Suggested Citation

  • Donald R. Haurin & Patric H. Hendershott & Dongwook Kim, 1990. "Real Rents and Household Formation: The Effect of the 1986 Tax Reform Act," NBER Working Papers 3309, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3309
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    References listed on IDEAS

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    1. Lawrence B. Smith, 1984. "Household Headship Rates, Household Formation, and Housing Demand in Canada," Land Economics, University of Wisconsin Press, vol. 60(2), pages 180-188.
    2. Borsch-Supan, Axel, 1986. "Household formation, housing prices, and public policy impacts," Journal of Public Economics, Elsevier, vol. 30(2), pages 145-164, July.
    3. Frances Goldscheider & Julie DaVanzo, 1985. "Living arrangements and the transition to adulthood," Demography, Springer;Population Association of America (PAA), vol. 22(4), pages 545-563, November.
    4. Meng, Chun-Lo & Schmidt, Peter, 1985. "On the Cost of Partial Observability in the Bivariate Probit Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 71-85, February.
    5. Sheldon Danziger & George Jakubson & Saul Schwartz & Eugene Smolensky, 1982. "Work and Welfare as Determinants of Female Poverty and Household Headship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(3), pages 519-534.
    6. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
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    Cited by:

    1. Andrejs Skaburskis, 1994. "Determinants of Canadian Headship Rates," Urban Studies, Urban Studies Journal Limited, vol. 31(8), pages 1377-1389, October.
    2. Andrejs Skaburskis, 1997. "Gender Differences in Housing Demand," Urban Studies, Urban Studies Journal Limited, vol. 34(2), pages 275-320, February.

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