Housing Tenure, Uncertainty, and Taxation
Harvey S. Rosen, Kenneth T. Rosen, Douglas Holtz-Eakin
NBER Working Paper No. 1168 (Also Reprint No. r0549)
Modern empirical work on the choice between renting and owning focuses on the concept of the "user cost" of housing, which integrates into a single measure the various components of housing costs. The standard approach implicitly assumes that households know the user cost of housing with certainty. However, the ex post user cost measure exhibits substantial variability over time, and it is highly unlikely that individuals believe themselves able to forecast these fluctuations with certainty. In this paper, we construct and estimate a model of the tenure choice that explicitly allows for the effects of uncertainty. The results suggest that previous work which ignored uncertainty may have overstated the effects of the income tax system upon the tenure choice.
Published: Rosen, Harvey S., Kenneth T. Rosen and Douglas Holtz-Eakin. "Housing Tenure, Uncertainty, and Taxation." The Review of Economics and Statistics, Vol . 66, No. 3, (August 1984), pp. 405-416.