Full Citation
Title: Wages and Rents: The Factor of Four
Citation Type: Miscellaneous
Publication Year: 2007
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Abstract: Data from the NIPA and from the Decennial Census of Housing show that the household expenditure share on housing is remarkably constant over time and across U.S. metropolitan areas (MSA). Consistent with this fact, we consider a basic frictionless model in which identical households have Cobb-Douglas preferences for consumption and housing. Households choose an MSA in which to live, and MSAs differ in the income residents receive and in quality of life. In equilibrium, given our estimate of the expenditure share on housing at 0.24, and holding quality of life constant, the model predicts that the difference in log rental prices of two MSAs must equal 4.2 times the difference in log per-capita income. The model provides an exact methodology to estimate MSA-level quality of life. Like TFP in macroeconomics, differences across MSAs in quality of life enable us to reconcile observed wages and rents with the predictions of the theory. We find that quality of life is significantly negatively correlated with population.
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Authors: Ortalo-Magne, Francois; Davis, Morris A.
Publisher: University of Wisconsin-Madison
Data Collections: IPUMS USA
Topics: Family and Marriage, Housing and Segregation
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