Land, Housing, Growth and Inequality

This paper contains a growth model that incorporates productive assets, residential land and residential structures. Moreover, it accounts for the existence of two social classes: the capitalists, who invest both in productive assets and in housing but do not provide labor services, and the workers, who invest only in housing and decide on how much labor effort to provide. Within this formal setup, it is shown that the relative price of land grows in the long run at the same rate as the economy’s GDP, while both the quantity of housing services and their price grow slower than it. Numerical examples show that i) shifting the taxation away from income and towards the property of land enhances long-term GDP growth and leads in the long-run to a more equalitarian (i.e. more favorable to the workers) income and wealth distribution, ii) a marginal increase in the fraction of investment expenditures in residential structures that is tax deductible reduces inequality in the distribution of income and wealth, iii) a change in agents preferences that gives more weight in the utility function to residential services leads in the long run to a distribution of income and wealth that is more favorable to the capitalists, iv) changes in taxation or in preferences increasing the fraction of total investment devoted to the accumulation of residential wealth rather than to the accumulation of productive assets brings about a balanced growth path characterized by a higher wealth-income ratio. Moreover, the paper illustrates how endogenous fluctuations may be generated along the equilibrium trajectory converging to the balanced growth path, in a model where housing wealth—as well as residential land distinguished from productive capital and only fundamentals (initial endowments, preferences and technologies) drive the economy's dynamics.