Premium
CITY EQUILIBRIUM WITH BORROWING CONSTRAINTS: STRUCTURAL ESTIMATION AND GENERAL EQUILIBRIUM EFFECTS
Author(s) -
Ouazad Amine,
Rancière Romain
Publication year - 2019
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12366
Subject(s) - economics , general equilibrium theory , econometrics , estimation , price elasticity of demand , structural estimation , elasticity (physics) , microeconomics , thermodynamics , management , physics
This article develops a general equilibrium model of location choice where mortgage approval rates determine household‐specific choice sets. Estimation of the model using San Francisco Bay area data reveals that the price sensitivity of borrowing constraints explains about two‐thirds of the price elasticity of neighborhood demand. General equilibrium analysis of the 2000–2006 relaxation of lending standards predicts the following impacts on prices and neighborhood demographics: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites reflecting gentrification. Both predictions are supported by empirical observation.