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Journal of Economic Literature: Vol. 51 No. 4 (December 2013)

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The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets

Article Citation

Kuminoff, Nicolai V., V. Kerry Smith, and Christopher Timmins. 2013. "The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets." Journal of Economic Literature, 51(4): 1007-62.

DOI: 10.1257/jel.51.4.1007

Abstract

Households "sort" across neighborhoods according to their wealth and their preferences for public goods, social characteristics, and commuting opportunities. The aggregation of these individual choices in markets and in other institutions influences the supply of amenities and local public goods. Pollution, congestion, and the quality of public education are examples. Over the past decade, advances in economic models of this sorting process have led to a new framework that promises to alter the ways we conceptualize the policy evaluation process in the future. These "equilibrium sorting" models use the properties of market equilibria, together with information on household behavior, to infer structural parameters that characterize preference heterogeneity. The results can be used to develop theoretically consistent predictions for the welfare implications of future policy changes. Analysis is not confined to marginal effects or a partial equilibrium setting. Nor is it limited to prices and quantities. Sorting models can integrate descriptions of how nonmarket goods are generated, estimate how they affect decision making, and, in turn, predict how they will be affected by future policies targeting prices or quantities. Conversely, sorting models can predict how equilibrium prices and quantities will be affected by policies that target product quality, information, or amenities generated by the sorting process. These capabilities are just beginning to be understood and used in applied research. This survey article aims to synthesize the state of knowledge on equilibrium sorting, the new possibilities for policy analysis, and the conceptual and empirical challenges that define the frontiers of the literature.

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Authors

Kuminoff, Nicolai V. (AZ State U)
Smith, V. Kerry (AZ State U)
Timmins, Christopher (Duke U)

JEL Classifications

C63: Computational Techniques; Simulation Modeling
D04: Microeconomic Policy: Formulation; Implementation; Evaluation
E61: Policy Objectives; Policy Designs and Consistency; Policy Coordination
H41: Public Goods
R23: Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics
R31: Housing Supply and Markets
R38: Production Analysis and Firm Location: Government Policy


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