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Title: Amenities as TFP and 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 householdexpenditure share on housing is remarkably constant over time and across metropolitan areas,despite sizeable changes to real rental prices and variation in income. Consistent with this fact,we consider a basic frictionless model in which identical households have Cobb-Douglas preferencesfor consumption and housing. Households choose an MSA in which to live, and MSAs differ inthe income residents receive and in amenities. Equilibrium in the model satisfies the followingproperties: (1) MSA-level per-capita income and rental prices increase at the same rate only whenper-capita housing is held constant; (2) per-capita housing will not be constant when per-capitaincomes increase at different rates across MSAs; (3) this income dispersion leads to disproportionaterent dispersion, that is, given our estimate of the expenditure share on housing of 0.25, and holdingamenities constant, the difference in log rental prices of two MSAs must equal 4 times the differencein log per-capita income; (4) the difference in log rental prices in any two MSAs is independentof the local housing supply in either MSA. The model provides an exact methodology to quantifychanges to the MSA-level total stock of housing and MSA-level amenities, much in the same waythat neoclassical growth theory provides a framework to identify changes to TFP given estimatesof capital and labor inputs. We find that in the past 24 years, the per-capita and total stock ofhousing has increased in almost every MSA we consider, and changes to per-capita income andamenities have been nearly perfectly negatively correlated across MSAs. The model raises issueswith regard to existing studies of the relationship of house prices, income, and local amenities.
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Authors: Ortalo-Magne, Francois; Davis, Morris A.
Publisher: University of Wisconsin-Madison
Data Collections: IPUMS USA
Topics: Housing and Segregation, Other
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