00 голосов за00 голосов против

34 просмотров17 стр.Housing tenure choice

May 31, 2017

© © All Rights Reserved

PDF, TXT или читайте онлайн в Scribd

Housing tenure choice

© All Rights Reserved

34 просмотров

00 голосов за00 голосов против

Housing tenure choice

© All Rights Reserved

Вы находитесь на странице: 1из 17

Author(s): J. V. Henderson and Y. M. Ioannides

Source: The American Economic Review, Vol. 73, No. 1 (Mar., 1983), pp. 98-113

Published by: American Economic Association

Stable URL: http://www.jstor.org/stable/1803929

Accessed: 29-05-2017 17:41 UTC

REFERENCES

Linked references are available on JSTOR for this article:

http://www.jstor.org/stable/1803929?seq=1&cid=pdf-reference#references_tab_contents

You may need to log in to JSTOR to access the linked references.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted

digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about

JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

http://about.jstor.org/terms

American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The

American Economic Review

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

A Model of Housing Tenure Choice

What are the determinants of tenure choice people choose to own or rent based on how

in the housing market? In the empirical liter- owning distorts their desired path of asset

ature (see, for example, Harvey Rosen; David holdings. Owning may require purchases of

Laidler) at the top of the list for the United assets at a time when dissaving would be

States are the income tax advantages of own- preferred, such as for young people who are

ing. Even given the excessive tax allowances on a low part of their life cycle path of

for depreciation enjoyed by landlords, back- income, or for old people who want to con-

of-the-envelope calculations of equilibrium sume their equity. Artle and Varaiya are able

effective prices indicate that it is still finan- to attain fairly explicit life cycle solutions,

cially advantageous to own rather than rent but at the expense of two unusually restric-

for all income brackets except for, say, the tive assumptions. They assume everyone at a

lowest-income quartile of families, unless a point in time and at every point over the life

family is planning to move soon (see John cycle must consume exactly the same quan-

Shelton). The qualification about moving en- tity of housing, regardless of wealth, price, or

ters because homeowners face higher trans- temporary income differences. Also, it is as-

actions costs of selling and moving than sumed arbitrarily that the opportunity cost

renters. of owning is less than the cost of renting.

While tax laws may favor owning in the The other approach in the theoretical liter-

United States, in many countries the tax ature is to solve for market equilibrium. The

treatment of renting vs. owning is financially only paper we know of which does this is by

unimportant, neutral, or biased towards rent- Yoram Weiss. While his study is interesting

ing. Therefore, in developing a general theo- because there is a complete market solution

retical framework, it is desirable to first con- dividing the world into renters and owners,

centrate on the noninstitutional economic the solution is derived under again unusually

aspects of the problem, and then introduce restrictive assumptions. In a world of perfect

consideration of country-specific institution- certainty, Weiss assumes that people are in-

al factors such as the tax system. This also dexed by differing efficiencies in producing

helps us understand the impact of tax laws housing services from homes if they owner-

on tenure choice. occupy. However, for some reason that ef-

There are two basic approaches to the ficiency is equal for all individuals when they

problem in the theoretical literature. One is rent. Given this dichotomy, not surprisingly

to look at the factors affecting the choices of those whose owner-efficiency parameter ex-

a single consumer. In looking at these fac- ceeds (is less than) the common rental ef-

tors, some recent writers concentrate on the ficiency parameter own (rent), in the absence

risk avoidance behavior of consumers in par- of institutional factors (taxes).

ticular situations facing uncertain future In this paper, we propose to integrate the

rents, housing prices, and rates of inflation key economic elements underlying the papers

(see, for example, John Bossons; Glenn in the literature and to relax the unusually

Canner; loannides). Other writers concen- restrictive assumptions. In particular, any

trate on life cycle aspects of the problem. differences in opportunity cost between rent-

Roland Artle and Pravin Varaiya examine ing and owning will be derived, housing con-

a situation under perfect certainty where sumption will be perfectly divisible and in-

come and price responsive, and there will be

*Brown University and Boston Universitvyuncertainty

respec- about future prices and returns.

tively. We thank an anonymous referee for comments The cost of integration will be some loss in

which were helpful in writing the final draft. terms of explicitness of life cycle and

98

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOA NNIDES: HOUSING TENURE CHOICE 99

be looking at are individuals operating in a ing for individuals with income streams in an

housing market in equilibrium and seeing appropriately defined region.

how their tenure choices are affected by Section III examines tax impacts and

wealth, life cycle, and other considerations. capital market imperfections.

Given this analysis, we can then identify

some of the critical characteristics of an equi- I. The Fundamental Rental Externality

librium.

Before introducing the life cycle and port- There is a basic externality connected with

folio considerations, we explicitly analyze the the rental of a durable that, given equi-

economic differences between the opportun- librium prices, makes it more attractive to

ity cost of renting and owning. This formally own than to rent. To isolate this factor, we

introduces a fundamental ingredient in- turn to analyzing the nature of durable good

volved in tenure choice decisions for any consumption in a world of perfect certainty.

durable, which as far as we know has been The services from a durable are a function

ignored in the theoretical literature. This is of the capacity or stock, and of the rate

accomplished in Section I, where an external- of utilization (see, for example, Guillermo

ity associated with renting durables is identi- Calvo). Where h is capacity and u the rate

fied and shown to be responsible for the of utilization, total services are

relative attractiveness of owning.

Section II introduces uncertainty and deals (1) h = hJf(u); f'>O, f' < o.

with comparisons between owning and rent-

ing when housing may be held as an invest- Thus at the same rate of utilization, services

ment good in a portfolio of assets. The gen- double if we double capacity, but less than

eral proposition is that a person's housing double if we double the rate of utilization for

consumption demand will not equal his the same capacity.

housing investment demand. If a person's The costs of greater rates of utilization

consumption demand for housing is less than include the resource costs of utilization itself

the quantity of the housing stock desired for such as time costs and the costs of increased

investment purposes, consumption demand maintenance and repairs. Events requiring

can be accommodated by simply occupying maintenance or repairs might be broken into

part of one's investment stock. In the ab- rough categories such as (i) breakdowns (for

sence of capital market imperfections, people example, furnace or electrical system in

in this position will definitely owner-occupy a house), (ii) obvious damages (broken

the housing they consume. We show that the windows), and (iii) "hidden" wear and

likelihood of a person being in this position tear (chipped or dirtied paint on walls or

is related critically to the time pattern of scratched floors). All these costs can be sum-

income receipts and the level of wealth. marized by the strictly convex function T(u)

If, on the other hand, in the portfolio where total utilization costs are

problem, consumption demand for housing

exceeds investment demand, a person may (2) h.T(u); T'> O, T"> O.

rent or owner-occupy. In analyzing this, we

assume a person cannot split his tenure so Nontime costs of utilization are incurred as

that part of his consumption is owner- maintenance required to restore the asset to

occupied and part is rented-a person can- its original condition. Alternatively, they

not be in two places at the same time. Thus could represent depreciation (capital loss) of

if he does owner-occupy in this situation, it the asset, or any combination involving par-

means he must "distort" his investment and tial restoration.

consumption choices to bring investment The externality involved in renting arises

levels into equality with consumption levels. from the maintenance problem. An owner-

This "distortion" may be incurred voluntar- occupier directly incurs hcT(u). But a land-

ily because the rental externality enhances lord can collect from the tenant only part of

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

100 THE AMERICAN ECONOMIC REVIEW MARCH 1983

variations in hCT(u), over and above the held constant. The same specification is also

basic contract rent. A tenant, of course, in- used later when uncertainty is incorporated.

curs his own time costs of utilization and, in (ii) For housing consumed in period 1,

addition, the tenant might be charged for costs of utilization are incurred in the second

items under the category of obvious damages period only.'

through, for example, deductions from a If he owns, the consumer's maximization

damage deposit. However, the marginal costs problem is to choose the values (x*, h*, S*,

of increased breakdowns and wear and tear u*} that maximize

caused by increased rates of utilization can-

not be fully charged to the tenant. It is (4) U(x, f ( u) hc) + V(w),

impossible to explicitly provide in rental

contracts for all possible contingencies, subject to y, = x + Phc + S

let alone to even collect on all contingen-

cies provided for. Thus tenants are assumed

w=y2+S(1+r)+Phc-T(u)hc.

to pay less than owners at all rates of util-

ization.

Tenants pay The function U( ) is the utility the consu

derives from the period 1 consumption bun-

dle and V(Q) is the indirect utility function of

(3) hT.(u); T > 0; Tr"'> 0;,

wealth remaining after period 1. Both U( )

and V(.) are assumed to be increasing and

where (u) < T(u) Vu, T'(u) < T'(u) Vu. strictly quasi concave. The term y, is period

This presents a classic externality problem 1 income; x is period 1 consumption of the

in the rental market, where tenants do not numeraire, which is all other goods; hc is

face the social marginal costs of their utiliza- housing stock purchased and u is its rate of

tion rates. This is not the case for owner- utilization; S is period 1 savings which earns

occupiers and is a critical factor in the the market real rate of interest r; P is the

determination of the opportunity cost of constant market purchase price of a unit of

renting vs. owning and occupying. We note it housing stock; and y2 is the income the con-

is also possible to rephrase this discussion in sumer receives in the beginning of period 2.

terms of a tenant being unable to collect Price P can differ between periods without

from a landlord for improvements he makes affecting the results (in equation (6) below, R

on an apartment. adjusts accordingly). We shall use v* to de-

note the maximum value of the consumer's

A. Renting vs. Owning lifetime utility, when he owns.

If he rents, the budget and wealth con-

To isolate the impact of this externality, straints of the consumer's maximization

we examine a consumer deciding whether to problem change. A renter, therefore, chooses

rent or own under conditions of perfect cer- the values {x, hc, , u} that maximize

tainty. Then we state the condition for market

equilibrium and, based upon this condition, (S) U(x, f (u) hc) + V(w),

do a comparison of owning vs. renting. The

following important assumptions are made: subjectto y, =x+S+Rhc;

(i) The consumer maximizes a mul-

tiperiod utility function. However, in terms of W = y2+ S(1 + r)-T(u)hc,

examining optimal period 1 decisions, we

can bury a third and subsequent periods in

the indirect utility function given remaining

'While it might be more realistic to specify time or

wealth at the beginning of the second period.

breakdown costs as being incurred in period 1, to con-

This assumes that optimal decisions are made

serve on notation and the number of functions we

in future periods, and that for our compara- specify them as occurring only once, with no loss of

tive statics, future prices and incomes are generality.

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOA NNIDES: HOUSING TENURE CHOICE 101

shall use v to denote the maximum value of

lifetime utility when the consumer rents.

T(u)

In market equilibrium, for there to be

owners of rental housing, interest foregone

on the equity in housing must equal housing

\ T (u)

profits. Thus for each unit of housing, equi-

librium in asset holdings requires that

(6) = R _ +(

MB

and not his landlord's choice variable (al-

though under perfect certainty the landlord

must know what its value will be). Given the

tenant's ui, the landlord directly recovers T(ii) U U U

utilization. Given the market-equilibrium FIGURE I

held as an asset by a landlord, rents are set

at a level that covers the financial opportun- (this follows from the separability in (1) and

ity cost plus costs of utilization not directly (2)).

recovered from the tenant, all appropriately The left-hand side of these equations can

discounted. Thus although tenants only di- be interpreted as the marginal benefits of

rectly pay T(ui) for utilization, they indirectly increasing utilization. For an owner, the

pay the balance in the form of higher rents. benefits are the increase in the rate of ser-

Finally in equation (6), we could specify vices from capacity, f'(u*), multiplied by

savings for either renters or owner-occupiers the marginal utility of capacity (where

as containing investment in housing. But (U2/U1)(1 + r) = (rP + T(u*))-f(u*)-1). In

given (6), no results would be altered by equilibrium in a world of perfect certainty,

adding these terms on, since under perfect the renter's ui would have to equal the u- of a

certainty from an investment point of view, landlord's tenant in equation (6). By sub-

investment in financial assets and investment stituting (6) into (8), we see that the equi-

in housing are perfect substitutes. librium schedules of marginal benefits of in-

By maximizing utility for renters and creasing utilization as functions of u are the

owners and combining first-order conditions same for (7) and (8). They are graphed in

with equation (6), we can obtain the equi- Figure 1. The marginal benefit curve is

librium rates of utilization under owning u*, downward sloping because f" < 0 (this can

and renting u1, respectively. These are given be seen by differentiating the left-hand side

by of (7) or (8)). The right-hand side of equa-

tions (7) and (8) are the marginal cost of

increasing utilization where for any u T' < T',

(7) MUf ) (rP + T(u*)) = T'(u*), and T", T" > 0. The two curves are depicted

f (U*)

in Figure 1. The obvious conclusion is that

in equilibrium u > uO. The externality results

in overutilization of capacity under rental

(8) M (R(l + r)+ T(u)) ='(u). tenure.

If there are no other considerations, rent-

Note that the level of capacity chosen does ing is always inferior to owning. The variable

not appear in (7) and (8) so that the equi- u is chosen on the basis of T(u) rather than

librium u* and ui are independent of capacity true costs. However, the tenant must indi-

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

102 THE AMERICA N ECONOMIC REVIEW MA RCH 1983

rectly pay the balance in terms of higher individuals from the spectrum of f(.) func-

contract rents (equation (6)). Formally to tions who will rent in equilibrium.2 For that

prove the desirability of owning, for any to occur, we need some other reason for

equilibrium P, we examine v, defined as a renting in the model, such as portfolio con-

Taylor-series expansion about P*. Thus, siderations or capital market imperfections.

- h*f (u*))+ V*'(w - w*)+ G. Durables such as housing may serve dual

purposes for many consumers-as a con-

For strictly quasi-concave functions, G < 0. sumption good and as an investment holding

Substituting in, using (6) where u = ui, and in a portfolio. To see this and its implica-

rearranging yields tions in a framework that has become a

standard tool of such investigations (com-

pare Agnar Sandmo, 1968), we examine the

(9) U* <( ) (rP + T( u*))-d} problem of a consumer simultaneously

choosing his optimal housing consumption

and his optimal portfolio.

x fi,(I+r), I< 0 We present the consumer-maximization

problem in a two-period model. However,

The variables 8 and d are defined by the from the work of Paul Samuelson, Eugene

Taylor-series expansions Fama, and Hayne Leland, we also know this

problem of optimal period 1 bundles can be

f(a) = f(U*)+ f'(u*)(a - U*)+ embedded in an n period framework if we

assume all investment and consumer deci-

and T(ui)=T(u*)+T'(u*)(Ci u*)+d, sions from the end of life back to period 1

are made optimally. The function that serves

where, by earlier assumptions on concavity as the period 2 utility function contains as

and convexity, 8 < 0 and d> 0. Owning arguments price distributions in future peri-

dominates renting. ods, future incomes, and future discount fac-

Note that owning dominates renting for tors. As long as these factors are held con-

everyone, even if people have differing ef- stant, we can derive propositions about the

ficiencies in their f( ) functions. One might allocation of wealth among consumption and

think that people who are less efficient in investment goods today. However, it should

producing housing services would rent to try be noted for reference below that the magni-

to shift the costs of high u's to landlords. tudes of relative and absolute risk-aversion

However, such a market equilibrium is not measures are not insensitive to many of the

sustainable, even if landlords cannot dis- factors which have been suppressed in repre-

criminate among potential tenants on the senting future utility by the indirect utility of

basis of differing f(.) functions. The proof is wealth remaining after period 1.

simple. Consider any potential group of peo- In the analysis to follow, we treat housing

ple from the spectrum of f( ) functions who investment as a risky asset, relative to a safe

might rent. For there to be any landlords, a financial asset. This conventional assump-

version of equation (6) must be met where tion may not be the most reasonable one.

contract rents are sufficiently higher than

expected maintenance costs to at least cover 2The referee suggested this situation could give rise

opportunity costs of investment. This means, to a signalling equilibrium where those with lower utili-

however, that people in that group of poten- zation rates would try to communicate this fact to the

landlord. A signalling equilibrium would only be possi-

tial renters with equal to or lower than ex- ble if lower utilization rates are negatively correlated

pected maintenance costs will find it finan- with signalling costs (see A. Michael Spence). We do not

cially disadvantageous to rent, as in equation see the basis for such an assumption in this case; also

(9). Thus there can never be a group of the topic is beyond the scope of the paper.

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOANNIDES: HOUSING TENURE CHOICE 103

savings deposits in many rents h units of housing capacity for con-

countries (unlike

Israel or Brazil) are not sumption purposes at a price R, and later

inflation-indexed,

their real return may be pays damage payments of T(u)hc, given his

more variable than

the real return to invest- preferred rate of utilization u.

ments in commodities such as housing (or Maximizing (10) with respect to {h., h1, S,

soybeans). However, it should be noted that, ui}, we get

for landlords, even if real capital gains have

a low variance in a stable market, each land-

(I la) -UIR + U2f(a)-E[V']T(a) = 0;

lord may face a high variance maintenance

expenditure (unpaid by the tenant). Below

(lIlb) -(P-R-L)U1 + E[V'(P(1 + 0)

we will explore the impact of altering the

specification of which asset is safe versus

risky. -L(I + r)-(T(u) )-T(ui)))] = 0;

Behavioral Models

(IlId) U2f'(Cu)-E [ V'] T'( ) = 0.

In the most general case the consumer

chooses his consumption demand, invest- Let v denote the maximum value of lifetime

ment holding of housing, savings, and the utility, (10).

rate of utilization (hI., hjI S, ui} so as to maxi- For the optimal rate of utilization, we

mize again obtain equation (8) by combining

equations (1 la), (1 ic), and (Ild). There-

(10) U(y,-S-(P-L-R)h, fore, u is independent of income, housing

capacity, and portfolio considerations. Other

-Rh., hJf(u))+ E{V( _2 ? S(1 + r)

straightforward manipulations yield

+ (P(1+0)-L(1I -r)-(T(uf)

(12a) f2f (aU) = R+

-( (u)))h1 - T(u .))).

(12b) rP/(I + r) = R

consumer's investment in housing which he

E [ V'(PO -(T(i u)-( Tu)))]

rents out to others in period 1 at a price of

E[V'](1 + r)

R. In period 2 he incurs noncollectable

maintenance costs of (T(iu)- T(iu)) h, that

are uncertain given that the tenants chose u. Equations (12a) and (12b) have standard

He can sell his asset for an unknown return interpretations as marginal conditions de-

of 0. To avoid having to deal with the costs termining h. and hi. In particular, (12b)

of defaults, we assume expresses the standard asset equilibrium con-

dition for assets with stochastic returns of

P(1 + 0)- L(1 + r) P(O)-(T(U)- T(i)), assuming the tenant's u

is uncertain; the return to housing is ad-

-(T(uf)-T(ff))>0, V6,u. justed above the return to the safe asset by

the individual's risk margin.

The term L reflects the fact that he can From (12a) and (12b) it should be clear

obtain a mortgage loan of L at the fixed that in this general problem, optimal housing

market rate of interest r. However, since consumption demand and optimal invest-

(dis)savings, S, is an unconstrained choice ment demand are quite different. If we were

variable for now, at the moment the presence facing a standard consumption-portfolio

of L is irrelevant. In Section III, however, it problem, our specification of the maximiza-

will play a critical role. Finally, the consumer tion problem would end here. We would turn

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

104 THE AMERICAN ECONOMIC REVIEW MARCH 1983

(Part B), focusing on the issue of when con-

sumption demand for housing exceeds or

(13 Y) hi - hc >, 0.

falls short of investment demand. But in Constraint (13') is indispensable for the

equations (10)-(12), consumption and in- validity of the expression (13). Secondly in

vestment are divorced and there is no issue (13), for own-consumed investment, the con-

of tenure per se, because everyone rents their sumer gives up Rh c in rental income in period

consumption. However, we made assump- 1 and pays utilization costs of T(u)hc in

tions earlier about the nature of housing period 2. On rented-out investment, he pays

which will ensure that some people will want uncompensated utilization costs of (h1 -

to owner-occupy their consumed housing. h c)(T(ii)- T(u)) in period 2.

If consumption demand is less than invest- If we let , be the Lagrange multiplier

ment demand, for example, it would be effi- corresponding to constraint (13'), the opti-

cient for the consumer to owner-occupy that mal consumption bundle {h*, h*, S*, u*)

part of his investment up to hc and rent out must satisfy the following conditions:

the rest, hI - *C. In doing so, he will avoid

the rental externality analyzed in Section I;

(14a) - RUi + f(u*)U2+ Ej[V'(T(u-)

and thus it can be shown that he will be

better off (Section III). If consumption de-

mand exceeds investment demand, however, -(u)-T(u*))] =jj;

we assume he cannot own only part of his

consumption; that is, his consumption ten- (14b) (P-L-R)U1-E[V'(P(I?+)

ure cannot be "split." But to avoid the rental

externality, if hc is near h1, he could "distort" - L(l + r)- (T(u-)- T()))] =I

his investment and consumption choices,

(14c) -U?+(l+r)E[V']=0;

raise h, to hc, and owner-occupy his entire

investment.3

Because consumption tenure cannot be (14d) f'(u*)U2-T'(u*)E[V'] = O;

split and because of the rental externality,

the maximization problem in (10) in fact (14e) ,u =0, h* - h* >O ;

only applies to people who are actually going

to rent their consumed housing. Renters are

(14f) ,>0, h7*-h* =O.

taken from the group of people for whom

hC >h1. All people for whom hc<hI and Equation (14a) indicates that the owner-

occupier by avoiding the rental externality

some for whom h C> h. will own. We turn

to their maximization problem now. "gains back" T(u-)- T(u) per unit of housing

investment used for own consumption.

1. The Owner-Occupier 's Problem If h* > h* so y = 0, the marginal condition

An owner-occupier's lifetime utility maxi- for determining h, is the same as (12b).

mization problem is to choose the values However, the other marginal conditions are

{h*, h*, S*, u*) that maximize different. For h* and u* we have

(13) U(y1-S-(P-L)h1

(15a) U2f(u*)/UI

+ R (h,- hc) hc:f (u*))

/ E[V'(T(ii)-T(u-))] T(u*)

+ E{V(y2 + S(l + r)- T(u)hc E [ V'](1 + r) 1 +r

(15b) f (u.) R(1+r)+T(u*)

+ [P(1 + 0)- L(l + r)] h,)},

E [V'"(T(u-)-T(au))] ,

ity. E [ V']

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. ] HENDERSON AND IOA NNIDES: HOUSING TENURE CHOICE 105

The opportunity cost of consuming an addi- and only if dy1 + dy2/(l + r) > 0. The time

tional unit of one's housing investment is the path of income is tilted if dy1 - dy2/(l + r)

value of net rent foregone (the first two * 0. If dy, - dy2/(l + r) > 0, the time path is

terms on the right-hand side of (15a), plus tilted towards period 1. If dy1 - dy2/(l + r)

the maintenance cost associated with owner- < 0, it is tilted towards period 2.

occupancy). Equation (15b) is similar to (8). In addition to these definitions, we make

However, if a is uncertain, the optimal u* one critical assumption. The wealth elasticity

now is no longer independent of income and of demand for housing consumption (in the

housing consumption, since the level of con- unconstrained maximization problem (10)) is

sumption chosen affects the uncertain utiliza- positive; that is, dh,/d(y, + y2/(l + r)) > 0.

tion rebate (T(u)- T(U)) from increased In short, we assume housing consumption is

own-consumption and owner-occupancy util- not an inferior good.

ization costs, thus affecting risk considera- The basic results can be derived by ex-

tions. amining the general consumption-portfolio

If ,u > 0 and h I= h c, then the interpreta- problem in (10). In doing comparative statics

tion of the first-order conditions is modified we assume U in (10) is additively separable,

accordingly. Combining (14a) and (14b), we we differentiate equations (1la, b, c) with

get respect to YI and Y2, and solve for changes in

h1, I h, and S. Note ( lId), or its equivalent

(16a) f(u*)U21U, = (P - L) - E [(V'IUI) (8), is not differentiated because ui is inde-

pendent of yl, Y2, and all preference parame-

X (P(i + 9)-L(l + r)-T(u*))]- ters. By differentiating and solving we get

(17a) dh, =-U'llIU22

D (1 +f(r)( i))2

(16b) f(u*)U2/U1 = P(r/(l + r))

xE[(P +y - O)V"]((I + r) dy, -dy2

vestment, is adjusted until the marginal (17b) dhc = D (R(I + r)2+ (1 + r)r)

evaluation of an additional unit of capacity

equals its marginal cost. Its marginal costs

are marginal utilization costs, T(u*)/(l + r), X (E[V"]E[(f + Y)2V"']

plus the value of expected opportunity costs

(foregone interest, rP/(l + r), less the value

of expected capital gains PE[V'0]/U1).

- (E[(# + -y)V"] )(Y. + + dY

section. What types of people are likely to (17c) dS= {T(1+r)Y1U1(R(1+r )2

rent vs. own their consumed housing; that is,

for whom will h1 < hc vs. h* > h*? Using the

above models, we can specify conditions un- + T(l+r))(E[V"( +y)2 ]E[V"]

der which the impact on tenure choice of

differences in total wealth and differences in - E[V"(3 + y)]2)? UIU22f( )2

the slope of the path, or tilt, of the income

stream can be unambiguously stated.

Total wealth consists of two components: xE[V"(3 + y)(3 + -y -

period income Y2. Total wealth increases if x(dy1 - dy2/(l + r)).

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

106 THE AMERICAN ECONOMIC REVIEW MARCH 1983

The auxiliary variables are defined as mand for housing increases as income is

tilted towards period 1. That is, dh/d(yl(l

P - PL(I + r); + r)- Y2) > 0 iff dA/dw < 0. Correspond-

ingly, the portfolio demand for housing de-

y-POa-(T(u) -T(u)); clines as income is tilted towards the future.

(iii) The consumption demand for hous-

a Y2 - (a)h? + S(1 r), ing, holding wealth constant, is unaffected

by the tilt of income. By assumption dh,

(P -L-R)(1+r). increases as wealth increases. (As an aside,

we note a sufficient but not necessary condi-

The determinant D of the Hessian ob- tion for this assumption to hold is that V

tained in differentiating equations (1 a, b, c) exhibits both decreasing absolute risk aver-

is given by sion (dA/dw < 0) and increasing relative risk

aversion (dF/dw > 0). These are also suffi-

D = UlIU22(f( ))2 4(1? y-() _- t cient conditions for D to be negative given

concavity of U and V.)

+ {U1I(R(l + r)+ (u))2 Given these results, the relative attractive-

ness of owner-occupancy vs. renting for indi-

viduals who have identical preferences but

+ U22(f(0)) 2(1 + r)2}

differ with respect to period 1 and 2 incomes

can be demonstrated. We do so graphically

X (E[ V"]E [(1 + y)2V"] in Figure 2 by examining regions of the

(y1, Y2) plane where people rent vs. owner-

-(E[(13 + ) ] ). occupy. By result (iii), differences in Yi and

Y2 which leave total wealth unchanged leave

For a consumer to be at a maximum, the housing consumption demand h C unchanged.

Hessian must be negative definite and a nec- Thus, the loci of points on the (yl, Y2) plane

essary condition for this is that D < 0. for which hc is constant are straight lines

To interpret the results in equations (17), with slope - (1 + r). Assuming an increas-

we utilize common concepts in the theory of ing wealth demand for housing, hc increases

risk aversion. We use the coefficient of the in the northeast direction as marked by

degree of absolute risk aversion (A) where h', h2, h3..

A = - V"/V'. Kenneth Arrow and subse- By result (i), the loci of points on the

quent writers argue that it is most "reason- (y1, Y2) plane for which the portfolio hold-

able" to assume that A declines as wealth ings of housing are the same are straight

rises, or that there is decreasing absolute risk

lines with slope (1 + r), along which dy, =

aversion. Both cases are considered, although dy2 (1 + r) -'. For wealth constant, a tilt from

we will focus on the case of decreasing A. Y2 to yi increases investment demand, if and

For later reference, we will also define only if dA/dw <0 from result (ii). Thus,

the relative risk aversion coefficient F= demand for hi increases in the southeast

-wV"/V'. direction as marked by the lines h', h2, h3 if

Examining equations (17), we can prove and only if absolute risk aversion is decreas-

the following. (Proofs where not obvious are ing. If dA /dw > 0, hI decreases in the south-

in the Appendix.) east direction.

(i) If wealth rises (dy(1?+ r)+ dy2 > ) The curve AXA illustrates a possible locus of

with no change in the tilt of the path of points for which hI = hc as yI and y2 change.

income (dyI(? + r)- dy2= 0), dh' = 0; or the Under the assumption of decreasing absolute

demand for portfolio holdings of housing risk aversion, AA must have slope less than

does not change. Similarly the demand for (1 + r) and greater than -(1 + r), so both hc

safe assets is unchanged. and h, move together. (If there is increasing

(ii) If and only if V exhibits decreasing absolute risk aversion, AA\z would have a slope

risk aversion (dA/dw < 0), the portfolio de- greater than (1 + r) or less than - (1 + r).)

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOANNIDES: HOUSING TENURE CHOICE 107

h3 h'

I

hl'h2Uh3

c c

The observed patterns of tenure choice are

Y2 ~~~~~~~~h1< h2h3 at odds with this completely general result.

The question is, why? Part of the explanation

may be that in correlating wealth and tenure

choice empirically, life cycle considerations

may not be controlled for, so that many of

the assumed low-wealth people are those with

strongly tilted income streams (see below).

Even so, the presumption is that controlling

for tilt, empirically, owner-occupancy rates

increase with wealth. The explanation in our

model must lie in factors other than un-

constrained portfolio-consumption demands,

such as the rental externality, tax laws, and

capital market imperfections. We explore

each of these in turn below.

0 Y1

2. Income Path and Tenure Choice

FIGURE 2

In Figure 2, it should be apparent that at a

given level of wealth there may be both

renters and owners. Assuming dAl/dw <0,

holding wealth constant, renters are those

The AA1 locus divides the plane into re- with lower y1(l + r)/y2's, or those whose in-

gions in a general consumption portfolio come streams are tilted towards the future.

where consumption demand exceeds or falls This would imply, for example, that among

short of investment demand. In our specific the young, renters would tend to be the more

application to housing, people to the south educated because their income streams tend

of 1< would owner-occupy because invest- to be more tilted to the future. Also, those

ment demand exceeds consumption demand. with more inherited financial wealth relative

For those to the north of /A~, their consump- to human capital wealth will have income

tion demand potentially exceeds their invest- streams tilted to the present, and will tend to

ment demand; and they are potential renters own. We do not view these as unexpected

(see subsection 3 for further analysis). results. Thus our real concern is accounting

for the observed wealth effects on tenure

1. Wealth and Tenure Choice choice.

The people to the north of /v/, for a given

Yi (1 ? r )/Y2, are those who have higher 3. Impact of the Rental Externality

wealth, as we move up any h, curve. Thus, Intuitive Analysis. The demarcations in

for any relative time path of income, higher Figure 2 using AA are based on problem (10)

wealth people will be renters. This result does which in fact is specific only to people who

not depend on the nature of risk aversion. actually rent their consumption. We know

With increasing absolute risk aversion, an from Part A of this section that owner-

untilted increase in wealth increases con- occupiers face a revised maximization prob-

sumption demand relative to portfolio de- lem; and this would apply to those who

mand. In that case, those to the east of the would initially desire hi > hC, because of

relevant wo (not shown) would be renters; the maintenance externality. Also those for

again these are high-wealth people. whom hi < hc but hi -_ hc are probably bet-

Similarly the result does not depend on ter off "distorting" their choices, equating hi

the characterization of housing as being the and hC, owner-occupying, and avoiding the

relatively risky asset. The demand for hous- rental externality. This suggests in our il-

ing consumption also rises relative to the safe lustrative solution that AA is only a hypo-

asset (S) with an untilted increase in wealth. thetical locus and that the actual boundary

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

108 THE A MERICA N ECONOMIC RE VIE W MARCH 1983

is another curve,

say A'z', which lies above AA. In essence,

the rental externality effectively shifts the

boundary between renters and owners in

favor of owning. V~~~~~~V

north of &'A', where everyone rents, a strip

on the plane (with 'A' being the north

boundary) where there is the constraint h*=

h* in equations (14) and (16), and the region 6m3

hold housing investments over and above

their own homes. This strip is drawn as = ..

stretching below AA for reasons cited below o y

The rental externality thus affects the rela-

tionship between wealth and tenure choice, O Y2

in the sense that it stretches out the region of

FIGURE 3

wealth in which people owner-occupy. How-

ever, unless the externality is so costly as to

eliminate renting, we would still expect re- The jump comes because once hc h

gions where, controlling for tilt, the highest for any h C, h , combination, the consumer

wealth people would still rent their consump- could owner-occupy hc of his h, investment

tion. This does not imply that low-wealth and avoid the rental externality. However,

people would be the direct landlords of once owner-occupancy occurs, the correct

high-wealth people, especially since the hold- maximization problem is given in (13) and

ings of a single low-wealth person might not this switch to the correct maximization prob-

provide the housing for a single high-wealth lem again raises utility to m l m 5. Along m 5 m Il

person. Rather low- and high-wealth people from m5 to, say, M6 h,> h*, at m6 h =h*

(who also have asset holdings of housing) where ,u = 0 in (14), and from M6 to mr1 > 0

would pool their money through stock hold- so that h* = h* by constraint.

ings in housing corporations. These corpora- It is not clear in Figure 3 whether mi6,

tions would be the direct landlords of high- where h* = h*, occurs to the left or right of

wealth tenants. m2, where hc= h,. We draw it to the left

Technical Analysis. To understand the im- based upon the following reasoning. Shifting

pact of the rental externality on A\A in Figure to owning at M 2 for the same hc and h,

2, we turn to Figure 3 where we plot indirect would raise "disposable" wealth because of

utility against period 2 income with period 1 the savings on the externality. Given the

income being held constant. We also assume same tilt to the income path, this wealth

decreasing absolute risk aversion, so that effect would raise hc relative to hi so, at

renters are those with low y, /y2's. Indirect that y2' we would expect h* > h*, although

utility is increasing in total wealth. The solid hc =hi. If h* > h* then h* =h* to the left of

curve v that turns into a dashed one at ml as m 2. For this same reason, the &'A' strip in

Y2 declines, plots the maximal value of utility Figure 2 extends south of AA.

for the renter's problem, equation (10). The Thus along the dashed extension of v,

solid part, as v increases beyond m ,, denotes m1m2 where h. < hc it pays people to dis-

equilibrium utility for renters. The solid curve tort their choices and set h,- =hC solving

mi5 m, plots the equilibrium values of v*, problem (14) for the case ,u > 0. The trade-

the maximal value of utility under owner- offs involved in adopting this distortion can

occupancy. The move from mim2 to miM5 be seen by doing a Taylor-series expansion

can be broken into two parts. The plotting of v about p*.

of v has a discontinuity at mi2, where it A Taylor-series expansion reveals three

jumps to the curve m3M4. At M2, hc = hi;factors in the tradeoff made by consumers as

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOANNIDES: HOUSING TENURE CHOICE 109

to whether to owner-occupy or rent.4 The taxable. The tax treatment of interest pay-

first two are obvious. The first is the owner- ments is the same for rental and owner-

occupancy savings from avoiding the mainte- occupied units. In short, the tax system makes

nance externality already documented in owner-occupying cheaper than renting. As-

equation (9). The second is the owner- sume momentarily that the income tax rate is

occupancy portfolio distortion cost of chang- constant so that individual tax burdens are

ing hI to h, which is the increase in invest- proportional. In this case, the impact of the

ment multiplied by the marginal cost of the tax system on tenure choice is identical to

increased risk incurred over and above the that of the rental externality (after removing

market risk premium given. The third factor the uncertainty facing landlords about the

is less obvious. A tenant's choice of the utili- rate of utilization u). Owner-occupancy per

zation rate, iu, may differ from the utilization unit of housing is cheaper than renting by

rate anticipated by landlords, EF[ u]. If i > some constant proportion. In Figure 2, this

E[ ii], there is an additional benefit to renting simply stretches out the region of wealth in

because a portion of the marginal cost of the which people owner-occupy. As with the

renterss excessive maintenance rate is not rental externality, unless the tax advantage is

borne by him. Thus, for example, those whose so great as to eliminate renting entirely, we

f( ) functions are shaped such as to result in would still find a region, where controlling

unusually high ii's will find it advantageous for the tilt of the income path, high-wealth

to rent. The opposite is the case for those people rent their consumption.

whose functions are shaped such that u < An effectively progressive tax system,

E [ i]. however, could eliminate the region of high-

wealth renters, implying everyone would

III. Other Considerations owner-occupy their consumption in the ab-

sence of transactions costs of moving. The

A. Taxes reason is that, although the discrepancy be-

tween desired consumption and investment

Suppose individuals face income taxes. increases with wealth, so does the per unit

Imputed rents to owner-occupiers are tax subsidy to owner-occupied consumption.

exempt while rental income of landlords is There will be a set of pairs of average tax

rates and marginal tax rates (degree of pro-

gressivity) above which renting would be

4We compare utility from renting with utility from eliminated.

owning when h* = h * h. We do a Taylor-series expan-

sion of v about v* and substitute in for i, x*, wv, and w*

from equations (10) and (13), from (14), and from the

B. Capital Market Imperfections

Taylor-series expansions of f and f * and T and f * from

(9). Details are available from the authors upon request. Capital market imperfections can be in-

Rearranging the result gives troduced into our model by imposing the

constraint in all maximization problems that

v - U, < (Sf*U2*/U*- E[ V'/U ]d)hd S > 0. That is, consumers cannot borrow

against future income for current consump-

- E[ V'l Ul ) (( T( u ) - T ( u ) - ( T(u)-T )) tion. However, they can borrow to purchase

durables which can be offered as collateral.

+ c-o)( g[V'/U, ,PO Thus the mortgage loan term L in the previ-

ous sections now has a meaningful role.

- T( U)-T(iU)]- Prem),

Formally, the constraint S > 0 changes all

where Prem is the market-equilibrium risk premium on

previous first-order conditions (equations

housing. When choosing to own, and hence bring h, and

(1 lc) and (14c)) on savings from - U1 +

h, into equality, - cov( ) is the premium required to (l+r)E[V'I]0 to

fully compensate the individual for incurring the in-

creased risk alone (ignoring the other factors). Prem is

(18) - U1 +(I+ r)E[P[V']0, if S*s< 0;

the smaller premium available in the market given the

equilibrium of demand and supply of housing as an

investment good. -U1+(l+r)E[V']<0, ifS*=0.

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

110 THE AMERICAN ECONOMIC REVIEW MARCH 1983

All our analyses would require adjustment to perfection where a minimum wealth level

account for how the shadow price y of the was required to obtain a loan, or there was a

constraint (S > 0) changes as total wealth minimum size requirement on a mortgage

and income stream tilt change. Under rele- (eliminating mortgages for cheaper homes).

vant mortgage loan terms, the principal im- If there are sufficient fixed costs to making

pact of the constraint is to make it less loans (irrespective of loan size), then a ra-

attractive to own, since owning requires risky tional banker could impose such a restric-

investment, when in fact, either total dissav- tion.

ings is desired to increase current consump- How do people behave who are con-

tion or dissavings in the safe asset is desired strained by the imperfections? We examine

(but prohibited) in order to finance purchases only the most interesting case, which applies

of the risky asset. This can be seen by using a to those who are already constrained in

Taylor-series expansion to compare renting owner-occupancy to have h, = h*. We want

and owning as we did in Section II. to know what are the impact of income and

Relevant mortgage loan terms are that, per of loan term changes on the demand for

unit of housing, P - L - R > 0; or P - L> R housing. For example, suppose Y2 increases

so that an owner-occupier requires a greater for y, constant. The resulting increase in

gross cash outlay to consume a unit of hous- total wealth enhances housing consumption

ing than a renter. Thus renting is attractive demand. However, the tilting of income to

since current consumption of all other goods the future lowers total portfolio demand and

is higher than under owning, as is desired increases the desire to dissave.

when y > 0. Why the constraint that P - L For this problem, assuming that the con-

- R > O? If P - L - R < 0, for any potential straints S = 0 and hi = hc remain binding,

landlord, the net outlays on housing invest- the relevant set of necessary conditions are

ments are negative, indicating that everyone one for housing consumption (which equals

will have an infinite demand for housing investment), that is equation (16a), and equa-

investments unless default is costly. Col- tion (14d) for uO. Differentiating these equa-

lateral has little meaning if negative net out- tions with respect to h*, u*, y1, and Y2, for

lays are allowed. dh* we obtain

We consider two issues with capital market

imperfections. What is their impact on tenure

choice and how do people who are con- (19) dh*= D9 [(P-L)U,I(f "U2

strained by the imperfections behave? The

basic wealth effects on tenure choice are

+ h - f,)2U22-T"E[V']+ h(T')2E[VVII)]

unchanged by capital market imperfections,

in a model in which housing consumption _dy

rises with wealth, and loans cover some max- _ Y2 { E [ V"'( + Y )] (f3 "U2 + h (f, )2 U2 2

imizing fraction of investment. For high-

wealth people, if the tilt of their income is

such that S > 0 is a binding constraint, then

- T"E [ V'I]) + T'E [ V"I (hfTU22)}

raising their investment towards their con-

sumption demand to owner-occupy is even where we have used auxiliary variables de-

more costly than it was before. Capital fined earlier; D is the determinant of the

market imperfections would only increase the Hessian obtained in differentiating (16b) and

size of the region in Figure 2 where high- (14d); and D > 0 for a maximum.

wealth people rent. It would also enlarge the Concavity of U, V, and f and convexity of

region of lower-wealth people with incomes T alone ensure that the expression in the

tilted to the future who rent. But, in summary,square brackets of the dy1 term is positive.

this standard specification of capital market An increase in y, increases h which is ex-

imperfections is not sufficient to alter our pected since the consumption (wealth) and

basic types of findings. housing investment effects (increased port-

We could, of course, eliminate low-wealth folio demand where only housing is in the

owners by introducing a capital market im- portfolio) move together. These same condi-

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 1 HENDERSON AND IOA NNIDES: HOUSING TENURE CHOICE 111

tions also ensure that an increase in Y2 upon the rate of utilization, which is as-

decreases h. Therefore, the increase in Y2 sumed to be chosen by occupants, whether

causes a reduction in total portfolio demand renters or owners. Equilibrium in the holding

dominating any other possible effects. This of assets implies that owning housing stock

reduction can only be met by reducing hous- does not differ from holding any other asset

ing investment since S = 0 already. unless uncertain rates of return are intro-

Finally, we note that the impact of chang- duced. With perfect certainty, tenure choice

ing loan terms, L, can be analyzed in the was shown to depend on an important exter-

same fashion. By differentiating (16b) and nality associated with renting. We showed

(14d) with respect to L, we get the rather that the presence of the rental externality

obvious result that an increase in loan size along with equilibrium in asset holding im-

per unit of housing increases the demand for plies that owning dominates renting. In addi-

housing. Consumption and investment de- tion, we showed that the equilibrium rate of

mands go together in this case. The loan utilization of housing stock for renters ex-

reduces the cost of the constraint of no dis- ceeds that of owners, and both are indepen-

savings, and housing consumption demand is dent of all individual characteristics. They

enhanced since more money for general con- depend only on market prices, technologi-

sumption is available in period 1. While this cal characteristics, and maintenance charge

result is obvious, some applications are schedules.

less so. Renting becomes more attractive if hous-

The analysis of a change in L dem- ing is subject to random capital gains or

onstrates the impact of expected inflation on losses and consumers may also invest in a

housing demand. Expected inflation under capital market at a fixed rate of return. In

the traditional U.S. mortgage contract where the model with uncertainty, the advantage

payments are a nominal fixed stream tilts which the rental externality confers on

the housing payment stream towards the owner-occupancy has to be weighed against

purchase period. That is, the real value of the the characteristics of consumers' risk avoid-

down payment and initial mortgage pay- ance behavior. We showed that individuals

ments rise relative to more distant payments. who either have less wealth or who receive

That, in effect, is formally equivalent in our relatively more of their wealth in the begin-

model to a reduction in the loan size, raising ning of their lifetimes will be the net lenders

the initial payment and lowering the later of housing, and vice versa for renters. These

one. Thus, people operating under our con- results hold under the set of restrictions on

straints (S = 0, h* = h*) will experience re- preferences which ensure that the consump-

duced demand for housing under the tradi- tion demand for housing increases with total

tional mortgage contract. Robert Schwab wealth. In the course of developing these

devotes much of his 1982 paper to showing results, we showed that within certain in-

just this. come ranges, because of the maintenance

externality, it pays people to "distort" their

IV. Conclusions investment and consumption choices and

owner-occupy rather than rent.

A model designed to illuminate the dual Finally we examined the impact of tax

role of housing as a consumption and invest- laws favorable to owner-occupancy and

ment good was successful in giving a whole of capital market imperfections on tenure

host of interesting predictions about housing choice. Apart from sufficiently large benefits

market behavior and the determinants of to owner-occupancy from either the rental

tenure choice. Some of these predictions agree externality or average levels of taxation,

with stylized facts and others can be tested which eliminate renting entirely, sufficient

empirically. progressivity of the income tax structure was

In our model, housing stock is used to the only assumption which eliminated the

produce housing services and as an invest- region of high wealth renters. Capital market

ment good. The amount of housing services imperfections inhibited owner-occupancy,

produced per unit of housing stock depends but did not alter the general pattern of re-

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

112 THE AMERICAN ECONOMIC REVIEW MARCH 1983

sults. Finally, we showed that, with capital We shall now examine the signs of the

market imperfections when consumption and terms:

investment demand for housing are con-

strained to be equal, housing consumption E(( + y)(/ + y- )VI

increases with first-period income, decreases

with second-period income, and increases E((/3 + y- ) - "}.

with the proportion of housing cost that can

be mortgaged. For the first term, by multiplying by h, and

by adding and subtracting aE((,/ + y -

APPENDIX )VI ),

dA/dw < 0 and dF/dw >? 0, the term

+ E((13 + -y - V a

is positive. In the course of doing this proof, =E{(,83+ ?y - V`)V h[h1(1 + y)+ a])

the signs of all relevant parts of equations

(17) and the determinant D will be explored. + aE{( -( + y))V")

We add and subtract the term E[V"]E{(3 +

-y)(/ + -y - ()V"} to obtain = E{(/, + -y -)"w)

E[V "]E{(/3 + Y)2V"}- (E{(1 + Y)V,,)2

If we can prove both of these expressions are

+ E[V"]E((f + -y)(3 + -y -)" negative, the proof is complete. By using the

definitions of absolute and relative risk-

- E[V"]E((/ + y)(/ + y - )VI aversion coefficients, we can write the above

expressions as equal to

=E[V"]E((1 + y)(f + y - - -y +))

-E{(/3+y- )V'F}

+ E[V"]E{(/3 + y)(3 + -y' -

- aE{(t-(/- + y))V'A}.

- (E((3 + y)V ))

If we define A and F as the values of A and

F when the state of nature 6 is such that

= E{( + y) V")[ E "]

/ + -y - =0 then the above becomes:

- E((f + y) V"}]

E{(F-F)(3+y-O)V')

= E[V"JE ((/ + y)(f + y - )VI given from (lI b) and ( llc) E{(/ + -y- )V')

(-) (-) =0; where 3+?y- >[<] 0, we have A-

A > [ < ] 0, if A is decreasing with w, and

- E((1 + y)V") E((3 + -y -)VI - A - A < [ > 0 O, if A is increasing with w.

(-) (?) Clearly E{(,B + -y-)V"}= O, iff A is con-

stant and is positive [negative] iff A is de-

creasing [increasing] with w. Similarly, where

By definition we /3+-y->[<<]

have that 0, F-F<[>] V" 0, if<F 0,is /3

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

VOL. 73 NO. 7 HENDERSON AND IOANNIDES: HOUSING TENURE CHOICE 113

nondecreasing with w. As a result, the first of Taxation of Income from Capital, Wash-

the above terms is negative, and so is the ington: Brookings Institution, 1969.

second, if a> 0, and F is assumed to be Leland, Hayne E., "Saving and Uncertainty:

nondecreasing and A is assumed to be de- The Precautionary Demand for Saving,"

creasing with w. Quarterly Journal of Economics, August

1968, 82, 465-73.

, "Optimal Growth in a Stochastic

REFERENCES Environment," Review of Economic Stud-

ies, January 1974, 41, 75-86.

Arrow, Kenneth J., Aspects of the Theory of Rosen, Harvey S., "Housing Decisions and the

Risk Bearing, Helsinki: 1965. U.S. Income Tax: An Econometric Analy-

Artle, Roland and Varaiya, Pravin, "Life Cycle sis," Journal of Public Economics, February

Consumption and Ownership," Journal of 1979, 11, 1-24.

Economic Theory, June 1978, 18, 35-58. Samuelson, Paul A., "Lifetime Portfolio Deci-

Bossons, John D., "Housing Demand and sions by Stochastic Dynamic Program-

Household Wealth," in L. S. Bourne and ming," Review of Economics and Statistics,

J. R. Hitchcock, eds., Urban Housing Mar- August 1968, 51, 239-46.

kets, Toronto: University of Toronto Press, Sandmo, Agnar, "Portfolio Choice in a Theory

1978. of Saving," Swedish Journal of Economics,

Calvo, Guillermo A., "Efficient and Optimal June 1968, 70, 106-22.

Utilization of Capital Service," American , "The Effect of Uncertainty of Sav-

Economic Review, March 1975, 65, 181-86. ing Decisions," Review of Economics Stud-

Canner, Glenn, " Redlining and Mortgage ies, July 1970, 37, 353-60.

Lending Patterns," in J. V. Henderson, ed., Schwab, Robert M., "Inflation Expectations

Research in Urban Economics, Vol. 1, and the Demand for Housing," American

Greenwich: JAI Press, 1981. Economic Review, March 1982, 72, 143-53.

Fama, Eugene F., " Multiperiod Consump- Shelton, John P., "The Cost of Renting vs.

tion-Investment Decisions," American Owning a Home," Land Economics, Feb-

Economic Review, March 1970, 60, 163-74. ruary 1968, 44, 59-72.

loannides, Yannis M., "Temporal Risks and Spence, A. Michael, Market Signaling, Cam-

the Tenure Decision in Housing Markets," bridge: Harvard University Press, 1974.

Economic Letters, 1979, 4, 293-97. Weiss, Yoram, "Capital Gains, Discrimina-

Laidler, David, "Income Tax Incentives for tory Taxes, and the Choice Between Rent-

Owner-Occupied Housing," in A. C. ing and Owning a House," Journal of Pub-

Harberger and M. J. Bailey, eds. The lic Economics, August 1978, 10, 45-55.

This content downloaded from 14.141.12.225 on Mon, 29 May 2017 17:41:54 UTC

All use subject to http://about.jstor.org/terms

## Гораздо больше, чем просто документы.

Откройте для себя все, что может предложить Scribd, включая книги и аудиокниги от крупных издательств.

Отменить можно в любой момент.