EITM: Dynamic General Equilibrium Models of Community Formation: Theory and Empirical Analysis

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ABSTRACTPROPOSAL NO: 0339328INSTITUTION: Duke UniversityNSF PROGRAM: EMPIRICAL IMPLICATIONS OF THEORETICAL MODELSPI: Bajari, PatrickTITLE: Dynamic General Equilibrium Models of Community Formation: Theory and Empirical AnalysisThis research project will develop a dynamic stochastic general equilibrium model of the housing market, community formation, and the intergenerational transmission of human capital that allows for externalities through peer group effects. The model will be solved numerically, a challenging methodological task because of the high dimensionality of the equilibrium housing price vector and associated fixed point problem. The research will also develop new methods for estimating consumer preferences for peer groups and housing by extending recent work in the analysis of demand for differentiated products. This is necessary to solve the housing model because in the demand model, a home is a bundle of three types of characteristics: physical characteristics of the home, characteristics of the community and a characteristic of the home observed by the agents in the economy, but not by the econometrician. A rich and flexible consumer preferences function, which depends on observable demographic characteristics and consumer specific tastes for product characteristics, is specified and estimated. The parametric distribution for the randomCoefficients is not specified a priori but recovered non-parametrically.The PIs will then use the estimated dynamic general equilibrium model as a social laboratory to study the assimilation of immigrants into different communities via the housing market over time. The model will be used to quantify the consequences of several policy experiments on the distribution of housing prices, the structure of communities and the long-run distribution of human capital and welfare. The policy reforms that will be studied include a liberalization of immigration laws between theU.S. and Mexico (which would lead to a substantial inflow of new Spanish speakinghouseholds into the housing market) and the introduction of housing subsidies for the poor.The result of this research will provide policy makers about the effectiveness of housing market policies in shaping the formation and structure of communities. The computational model that will be developed will be used as an investigative toll in a wide variety of social policies, including whether housing subsidies for the poor is an appropriate tool to reduce long-run segregation of communities, long-run income and thus welfare inequality.