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International Economic Review
Volume 60, Issue 2 p. 721-749
Original Article

CITY EQUILIBRIUM WITH BORROWING CONSTRAINTS: STRUCTURAL ESTIMATION AND GENERAL EQUILIBRIUM EFFECTS

Amine Ouazad,

Corresponding Author

Amine Ouazad

HEC Montreal, Canada

Please address correspondence to: Amine Ouazad, HEC Montreal, 3000 Chemin de la Côte Sainte Catherine, Montreal H3T 2A7, Canada. E-mail: amine.ouazad@hec.ca.Search for more papers by this author
Romain Rancière,

Romain Rancière

University of Southern California, U.S.A.

We thank Patrick Bayer, Jenna Bednar, Jan Brueckner, Morris Davis, Gilles Duranton, Ambika Gandhi, Matthew Kahn, Scott Page, Chris Redfearn, Stuart Rosenthal, Holger Sieg, the audiences of the CEPR Conference in Urban and Regional Economics conference in Philadelphia, INSEAD, Ecole polytechnique, University of Southern California, University of Virginia, World Bank, and University of Montreal seminar series for fruitful comments. We thank the three anonymous referees for their valuable input. Marton Varga provided research assistance. The authors acknowledge financial support from INSEAD, the International Monetary Fund, the Chaire Banque de France.

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First published: 02 October 2018
https://doi.org/10.1111/iere.12366
Citations: 1

Abstract

This article develops a general equilibrium model of location choice where mortgage approval rates determine household-specific choice sets. Estimation of the model using San Francisco Bay area data reveals that the price sensitivity of borrowing constraints explains about two-thirds of the price elasticity of neighborhood demand. General equilibrium analysis of the 2000–2006 relaxation of lending standards predicts the following impacts on prices and neighborhood demographics: (i) an increase in house prices accompanied by a compression of the price distribution and (ii) a reduction in the isolation of Whites reflecting gentrification. Both predictions are supported by empirical observation.

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