Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2019 010

Understanding the Role of Housing in Inequality and Social Mobility

Yang Tang
Xinwen Ni

Housing typically takes up a major proportion of households' expenditure, and
thus it certainly plays a critical role in shaping the pattern of income in-
equality and social mobility. Whether high housing price-to-rent ratio will am-
plify inequality and inhibit social class upgrading is still a controversial
issue in the existing literature. In this paper, we develop a partial
equilibrium life- cycle framework to address these issues. Agents in our economy
are divided into two social classes according to the initial human capital level
inherited from their parents. Those who belong to upper class will draw their
innate abilities from a distribution that rst order stochastically dominates
those from lower class. Throughout the entire lifecycle, agents make endogenous
human capital investment and housing tenure decisions. We calibrate the model to
mimic some stylized facts in the the real world counter part. Our simulation
results indicate an inverse-U pattern between housing price-to-rent ratio and
measures of income inequality, and as well as a U-shape pattern between price-
to-rent ratio and social mobility measured by Shorrocks Index. The implication
is that housing tends to amplify the inequality and slow down the social
mobility when houses can only be purchased by a small group of agents in the
economy. Moreover, our results also suggest that better quality of education as
a result of a higher return to human capital investment tends to dampen the role
of housing.

Income Inequality, Social Mobility, Price-to-rent ratio

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