You can take it with you: Proposition 13 tax benefits, residential mobility, and willingness to pay for housing amenities ☆
By Fernando V. Ferreira. 2010
128 citations recorded by the source corpus.
The endogeneity of prices has long been recognized as the main identification problem in the estimation of marginal willingness to pay (MWTP) for the characteristics of a given product. This issue is particularly important in the housing market, since a number of housing and neighborhood features are unobserved by the econometrician. This paper proposes the use of a well defined type of transaction costs-moving costs generated by property tax laws-to deal with this type of omitted variable bias. California's Proposition 13 property tax law is the source of variation in transaction costs used in the empirical analysis. Beyond its fiscal consequences, Proposition 13 created a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in the same house for a long time. Its importance to homeowners is estimated from a natural experiment created by two amendments that allow households headed by an individual over the age of 55 to transfer the implicit tax benefit to a new home. Indeed, 55-year old homeowners have 25% higher moving rates than those of comparable 54 year olds. These transaction costs from the property tax laws are then incorporated into a household sorting model. The key insight is that because of the property tax laws, different potential buyers may have different user costs for the same house. The exogenous property tax component of this user cost is then used as an instrumental variable. I find that MWTP estimates for housing characteristics are approximately 100% upward biased when the choice model does not account for the price endogeneity.
Subfields: Economics and Econometrics, General Decision Sciences
View Paper: https://www.semanticscholar.org/paper/ed8b87985d88fc678f1075e467a2b4cd794985cb
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Citations in the corpus
- Regression Discontinuity Applications with Rounding Errors in the Running Variable (2015, unknown): “…(2008), Card et al. (2008, 2009), Carpenter and Dobkin (2009), Chen and van der Klaauw (2008), De Giorgi (2005), Edmonds (2004), Edmonds et al. (2005), Ferreira (2010), Lalive et al. (2006), Lalive (2007, 2008), Lee and McCrary (2005), Lemieux and Milligan (2008) and Leuven and Oosterbeek (2004).”
- Correcting for endogeneity due to omitted attributes in discrete-choice models: the multiple indicator solution (2016, methodology): “The control function (CF) method can address endogeneity for discrete-choice models in which thismodel flaw occurs at the level of each alternative1 (Ferreira 2010; Guevara and Ben-Akiva 2006, 2012; Petrin and Train 2002).”
- Causal Inference in Urban and Regional Economics (2014, unknown): “Ferreira (2010) studies the impact of property taxes on residential mobility, and Pence (2006) studies the impact of mortgage credit laws on loan size.”
- The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets (2013, result): “Ferreira (2010) reports similar findings in an investigation of the implicit moving costs conveyed by property tax regulations in California.”