Working Paper: NBER ID: w18767
Authors: Stephen Coate
Abstract: Recent empirical work in public finance uses the housing price response to public investments to assess the efficiency of local durable public good provision. This paper investigates the theoretical foundations for this technique. In the context of a novel theoretical model developed to study the issue, it shows that there is little justification for the technique if citizens have rational expectations concerning future investment in their communities. An example in which investment is chosen by a budget-maximizing bureaucrat is developed to show why the technique can falsely predict under-provision. The technique is valid, however, when citizens have adaptive expectations, believing that whatever provision level that currently prevails will be maintained indefinitely.
Keywords: No keywords provided
JEL Codes: H41; H43; H75
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| housing prices rise following investment in durable public goods (H40) | indicates underprovision (H42) |
| housing prices fall following investment in durable public goods (H40) | suggests overprovision (H42) |
| rational expectations (D84) | housing price response does not reflect efficiency of public good provision (R31) |
| adaptive expectations (D84) | housing price response reflects efficiency of public good provision (R31) |
| bureaucratic decisions (D73) | misalignment between public good levels and social optimality (H49) |
| public good investments approved (H54) | impact on housing prices (R31) |