NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

An Equilibrium Model of Sorting in an Urban Housing Market

Patrick Bayer, Robert McMillan, Kim Rueben

NBER Working Paper No. 10865
Issued in November 2004
NBER Program(s):   PE

This paper introduces an equilibrium framework for analyzing residential sorting, designed to take advantage of newly available restricted-access Census microdata. The framework adds an equilibrium concept to the discrete choice framework developed by McFadden (1973, 1978), permitting a more flexible characterization of preferences than has been possible in previously estimated sorting models. Using data on nearly a quarter of a million households residing in the San Francisco Bay Area in 1990, our estimates provide a precise characterization of preferences for many housing and neighborhood attributes, showing how demand for these attributes varies with a household's income, race, education, and family structure. We use the equilibrium model in combination with these estimates to explore the effects of an increase in income inequality, the findings indicating that much of the increased spending power of the rich is absorbed by higher housing prices.

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Document Object Identifier (DOI): 10.3386/w10865

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