Ortalo-Magné, François and Prat, Andrea (2007) The political economy of housing supply: homeowners, workers, and voters. TE/2007/514. The Suntory Toyota International Centers for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.
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Abstract
Equilibrium of the housing market depends on a complex set of interactions between: (1) individual location decisions; (2) individual housing investment; (3) collective decisions on urban growth. We embed these three elements in a model of a dynamic economy with two sources of friction: ill-de…ned property rights on future land development and uninsurable shocks a¤ecting labor productivity. We characterize the feedback between the households’ desire to invest in housing as a hedge against the risk of rent ‡uctuations and their support for supply restrictions once they own housing. The model generates an ine¢ ciently low supply of housing in equilibrium. The model also rationalizes the persistence of housing undersupply: the more restricted the initial housing supply, the smaller the city size selected by the voting process. We use the model to study the e¤ects of a number of policies and institutional changes.
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