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This paper examines the role of land in wealth dynamics and its
consequences on efficiency and inequality. We focus on the interplay
among agents’ bidding for location, mortgage market imperfections,
and inheritance in a model in which agents leave to their
heirs financial bequests and their housing wealth. The borrowing
constraint generates a housing return premium and spatial wealth
sorting, which translate into persistent wealth inequality. Since altruism
and the borrowing constraint distort land price formation,
we show that taxing land rent transmitted between generations is
optimal. Land taxation cannot be disconnected from taxation on
intergenerational wealth transfers.
