Working Paper: NBER ID: w16349
Authors: Nicolai V. Kuminoff; V. Kerry Smith; Christopher Timmins
Abstract: Households "sort" across neighborhoods according to their wealth and their preferences for public goods, social characteristics, and commuting opportunities. The aggregation of these individual choices in markets and in other institutions influences the supply of amenities and local public goods. Pollution, congestion, and the quality of public education are examples. Over the past decade, advances in economic models of this sorting process have led to new framework that promises to alter the ways we conceptualize the policy evaluation process in the future. These "equilibrium sorting" models use the properties of market equilibria, together with information on household behavior, to infer structural parameters that characterize preference heterogeneity. The results can be used to develop theoretically consistent predictions for the welfare implications of future policy changes. Analysis is not confined to marginal effects or a partial equilibrium setting. Nor is it limited to prices and quantities. Sorting models can integrate descriptions of how non-market goods are generated, estimate how they affect decision making and, in turn, predict how they will be affected by future policies targeting prices or quantities. Conversely, sorting models can predict how equilibrium prices and quantities will be affected by policies which target product quality, information, or amenities generated by the sorting process. These capabilities are just beginning to be understood and used in applied research. This survey article aims to synthesize the state of knowledge on equilibrium sorting, the new possibilities for policy analysis, and the conceptual and empirical challenges that define the frontiers of the literature.
Keywords: Equilibrium Sorting; Policy Evaluation; Public Goods
JEL Codes: D61; H41; Q50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household sorting behaviors (D10) | Supply of local amenities and public goods (H49) |
| Supply of local amenities and public goods (H49) | Housing prices and amenities (R31) |
| Household sorting behaviors (D10) | Housing prices and amenities (R31) |
| Policies targeting amenities (R28) | Market outcomes (D49) |
| Household sorting behaviors (D10) | Feedback effects that alter neighborhood attributes (R23) |
| Feedback effects that alter neighborhood attributes (R23) | Housing prices and amenities (R31) |