Sunday, May 03, 2009

Housing Foreclosure Research and Environmental Economics

Economists are writing on the consequences of foreclosure. High quality empirical papers are being written on testing for whether; "if my neighbor is forced to sell his house, does this reduce the price of my house?" (see http://www.nber.org/papers/w14866). More broadly, does foreclosure impose negative externalities (i.e social costs) on neighbors? You could imagine that the answer is no. If Matt defaults on his house and hands the keys to the bank and the bank turns around and sells the house to Sally, then this is a transfer from Matt to Sally but there is no "social cost". This simple example assumes that there are no frictions and that assets are immediately allocated to the highest bidder. But, suppose that Walras' auction takes time due to search and other option value factors. Now suppose that over time that if the asset is abandoned (there is nobody living in the house); its quality declines and it becomes a nuisance --- either the grass is not cut, it attracts bums and drug dealers or if it has a swimming pool --- the home breeds bugs that spread disease see Los Angeles Times Article on "Green" Pools .

At the UCLA Institute of the Environment, we are working on this last case. I will report back soon on how we do the empirics to study this issue. In our Little Homby community in Westwood, we don't know any of our neighbors. In this setting, what does it mean to be a good neighbor? Well, I don't want your teenagers throwing beer cans on my property and I don't what creatures born in your swimming pool flying over and infecting my son. The extent of these bad "social interactions" can be quantified!

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