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Tweaking the DiPasquale–Wheaton–Colwell model

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Abstract

The so-called “four-quadrant” model (DiPasquale and Wheaton in R Estate Econ 20(1):181–197, 1992) is probably the most popular and most studied model of long-run equilibrium in aggregate housing markets. Nevertheless, it has some drawbacks. Colwell (J Hous Econ 11(1):24–39, 2002), therefore, adds new devices to the model (referred to as “tweaks”) to remove several important drawbacks. However, also the modified version of the “four-quadrant” model neglects a very important feature of housing markets: the search-and-matching process. Hence, we add to the DiPasquale–Wheaton–Colwell model the key features of this (time-consuming) process. This theoretical integration is relatively simple but economically profound, since the model is now characterised by a decentralised and uncoordinated equilibrium.

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Notes

  1. Indeed, DiPasquale and Wheaton (1994) show that the DW model can account for most of the annual fluctuations in the U.S. housing market. Also, Leung and Wang (2007) and Chow et al. (2008) show that the features of the Chinese housing market are well captured by the DW model.

  2. A situation where the initial response of a factor to an impact or shock is greater than its longer-term response. In this case, “overshooting” describes the fact that before the housing stock gets to its new long-run value in response to a shock, it may initially move past or “overshoot” the new level to which it will eventually settle.

  3. As recognised by Colwell himself (2002, p. 36).

  4. For the time being, both the rent and the sale price are denoted with the generic term of house price P.

  5. For simplicity, we assume the same “destruction” rate λ for both markets.

  6. In matching models (e.g., Pissarides 2000; Petrongolo and Pissarides 2001) an aggregate matching function is used to summarize the trading frictions that delay the meeting between the parties, thus making the search and matching process costly and time-consuming. Precisely, the matching function is strictly increasing but concave in both arguments and displays constant returns to scale. These common assumptions in the matching literature allow for the introduction of the key variable of the model, namely, the ratio between vacancies and seekers, more commonly known as “market tightness”.

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Correspondence to Gaetano Lisi.

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Lisi, G. Tweaking the DiPasquale–Wheaton–Colwell model. Lett Spat Resour Sci 13, 201–208 (2020). https://doi.org/10.1007/s12076-020-00253-2

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