State Misallocation and Housing Prices

State Misallocation and Housing Prices - American Economic...

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Unformatted text preview: American Economic Review 101 (August 2011): 20812107 http://www.aeaweb.org/articles.php?doi = 10.1257/aer.101.5.2081 2081 State participation in the housing market occurs in several forms in countries throughout the world. The provision of subsidized housing as a welfare benefit to low income households is common throughout the Western hemisphere. In addition, local governments in several cities in the United States have implemented regula- tions that limit the increase of rents charged by landlords. 1 This paper focuses on a form of state intervention in housing that occurs through the provision of subsidized homes to state employees. The economic consequences of this area of research are potentially large as employer-provided housing in the state sector is common throughout the developing world, particularly in Asia and sub-Saharan Africa. Government regulation of the private market or the creation of a separate mar- ket ensures that certain households have access to housing at prices that are below market value. State interventions that aim to bring affordable housing to particu- lar subsegments of the population can create economic inefficiencies. They distort the decisions that individuals make regarding residential mobility ( Joseph Gyourko and Peter Linneman 1989; Gordon A. Hughes and Barry McCormick 1987 ) and employment ( Michael Svarer, Michael Rosholm, and Jakob Roland Munch 2005; Wang forthcoming ) , and they lead to underinvestment in the construction and main- tenance of housing ( John C. Moorhouse 1972; Choon-Geol Moon and Janet G. 1 See Richard Arnott ( 1995 ) for an overview of research on rent control in North America. He also presents a brief history of the evolution of rent control in the United States and Europe. State Misallocation and Housing Prices: Theory and Evidence from China By Shing-Yi Wang* This paper examines the equilibrium price effects of the privatization of housing assets that were previously owned and allocated by the state. I develop a theoretical framework that shows that privatization can have ambiguous effects on prices in the private market, and that the degree of misallocation of the assets prior to privatization deter- mines the subsequent price effects. I test the predictions of the model using a large-scale housing reform in China. The results suggest that the removal of price distortions allowed households to increase their consumption of housing and led to an increase in equilibrium hous- ing prices. ( JEL L33, O18, P25, R31, R38 ) * New York University, 19 W. 4th Street, 6th floor, New York, NY 10012 ( e-mail: shingyi.wang@nyu.edu ) . This paper has benefitted from feedback from Santosh Anagol, A. V. Chari, Hanming Fang, Mark Rosenzweig, Kevin Thom, Chris Udry, Akila Weerapana, Alwyn Young, various seminar participants, and an anonymous referee. All errors are my own....
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State Misallocation and Housing Prices - American Economic...

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