The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets

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 a 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 that 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.

Panel Data Hedonics: Rosen's First Stage as a "Sufficient Statistic"

“…While such models can overcome endogeneity problems in estimation, the hedonic literature has not reached a consensus on the interpretation of just what such models actually identify and whether they are economically meaningful. In contrast both to one recent interpretation of these models as identifying a vague "capitalization effect" that mixes information from different equilibria (Klaiber andSmith 2013, Kuminoff andPope 2014) and to another interpretation of them as identifying a Marshallian welfare measure (Greenstone and Gallagher 2008), I show that the estimand defined by difference-in-differences hedonics has a clear interpretation as a lower bound on the Hicksian equivalent surplus for a non-marginal change in characteristics, even when general equilibrium effects are present. The bound is analogous to measures first suggested by Bartik (1988) and Kanemoto (1988).…”

“…These approaches have the advantage of identifying a reduced form relationship between prices and characteristics under credible assumptions about the source of variation in the data. However, because they mix information from two or more hedonic equilibria, whereas the welfare measures are rooted in a single cross-sectional equilibrium relationship, these advantages come at the cost of a transparent connection to the underlying structural model and hence to the ability to make welfare inferences (Klaiber andSmith 2013, Kuminoff andPope 2014).…”

Causal Inference in Urban and Regional Economics

“…Bayer, Ferreira, & McMillan (2007), which we discuss in Section 6, shows how to recover the distribution of willingness to pay for school quality and socio-demographic characteristics of neighborhoods using a structural model married with a regression discountinuity identificaton strategy to control for unobserved neighborhood characteristics. Kuminoff, Smith, & Timmins (2013) present a review of the many structural models of supply and demand equilibrium in housing markets that can be used to recover willingness to pay for public goods.…”

Economic behavior of households and their impact on the development model of the country

“…The fact that the level of economic development in western countries is so attractive for labor migrants that population educated in other countries can be demanded in labor markets of developed economies is another answer to the question [11]. That is why the level of education expenditure is rather low in western countries.…”