TAILIEUCHUNG - A Companion to Urban Economics - Arnott and McMillen - Chapter 9

C H A P T E R N I N E The Economic Theory of Housing Tenure Choice INTRODUCTION Within the theory of housing markets, one may broadly distinguish three approaches, which roughly correspond to the historical development of the discipline. | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER NINE The Economic Theory of Housing Tenure Choice Franz Hubert Introduction Within the theory of housing markets one may broadly distinguish three approaches which roughly correspond to the historical development of the discipline. The first retains the assumption of a perfect frictionless competitive market mechanism when addressing issues of localization heterogeneity durability housing taxation and so on. This line of research reached a considerable degree of maturity in the mid-1980s. It has greatly improved our understanding of urban spatial structure the determinants of housing supply and demand and the measurement of prices for heterogeneous goods. Given the assumption of a perfect mechanism for the allocation of housing however the welfare implications remain humdrum. With the possible exception of neighborhood externalities housing markets appear efficient provided that all agents are forward-looking and rational. The second approach emphasizes imperfect competition and frictions resulting from search cost mobility cost and contractual incompleteness. A central question is how markets actually achieve coordination in the absence of a Walrasian auctioneer given all the particularities of housing. Stimulated by the advances in the theory of imperfect information incomplete contracts optimal search and matching markets this strand of research took off in the 1980s and has made substantial achievements since then. The literature deals with a broad range of issues for example the role of real estate agents the purpose of the various features of rental contracts vacancy rates optimal pricing strategies and search 146 F. Hubert behavior and so on. This approach delivers a more realistic picture of the institutions and mechanisms through which coordination is achieved and adds a cautious note with respect to the welfare properties of

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