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Urban and Regional Economics
Professor James R. Follain
Fall 1997
Syracuse University
Tu-Th 11:30-12:50
Office: 447 Eggers
follain@maxwell.syr.edu
Office Hours: Tu-Th 10:05-11:20
309 Bowne Hall
home page: http://www.maxwell.syr.edu/maxpages/faculty/follain/resources/jimspg.htm
class web site: http://www.maxwell.syr.edu/maxpages/classes/ecn745/index.htm
I. Introduction
Subject Matter.
Urban and regional economics is a very broad field. Some of it falls neatly into the field called urban economics, which focuses primarily on intrametropolitan issues. Regional economics can be thought of as a study of intermetropolitan issues. The fields include very sophisticated theoretical work that incorporates space or location into microeconomic models of economic behavior. The fields also include a substantial amount of empirical work that tests various hypotheses generated by the theory. The fields also encompass rather basic work in the measurement and accounting of regional economic performance.
This particular urban and regional course can be divided into the study of two broad but related topics. The first covers various aspects of the economics literature dealing with housing and housing finance. This is the area in which I do much of my own research. Students who want to work with me on a dissertation will find this part of the course essential. We will consider several issues related to the housing market. We will explore why housing prices vary among metro areas and over time and the impact of tax policy on housing markets. We will also examine the market for housing finance; this includes topics in the pricing of mortgage securities, household decisions about mortgage versus equity finance, and several important issues in tax policy, e.g. what would be the effect of eliminating the mortgage interest deduction.
The second topic covers aspects of regional economics. We will investigate some traditional topics like Henderson’s system of cities, but we will also pay special attention on the "new regional economics". We will consider various definitions of this new regional economics. My own sense is that this literature is building on some of the developments in the "new international trade" literature that has, among other things, caused a fundamental reconsideration of the costs and benefits of free trade. It is also related to the renewed interest in models of economic growth that incorporate endogenous technological progress. I think both literatures may offer insights regarding the booming business in local economic development and of the relevance of unique and stable equilibrium models of regional economies. Paul Krugman is a major contributor to this growing literature and we will read portions of his book on the topic. We will also read portions of the new book by Barro and Xali-Martin entitled Economic Growth.
I will also argue there is a potentially important and underdeveloped connection between the two parts of the course. In particular, the literature seems to have underdeveloped the connection between regional economic activity and housing price movements. Yet this connection is particularly important to the determination of the value of mortgage-backed securities and firms heavily invested in them, e.g. Freddie Mac and Fannie Mae. The potential for substantial growth and decline in the new regional economic models makes this connection even more interesting. For example, one can ask whether the different types of regional models suggest different strategies for portfolio diversification in the housing and mortgage market. It also raises the possibility of regional economic catastrophes not typically considered in the traditional equilibrium regional models.
Course Objectives. The course has three main objectives. First, you will be introduced to some of the major concepts and literature embodied in the literature on these two topics. The doctoral students in economics would be qualified to teach an undergraduate course in urban and regional economics. With more study, a dissertation in the area, and Ecn 741 you would also be qualified to offer a graduate course in the area. Second, your skills as an applied and empirically oriented microeconomist ought to be sharpened and further developed. The premier skill within this collection of skills is your ability to use micro and macro economics to develop hypotheses that can be tested with data. As such, you will be encouraged to understand the major assumptions upon which the theoretical models are based and testable hypotheses to help distinguish among the many competing models of housing and regional economics. Third, I hope your ability to communicate economic ideas and results will be improved. The primary exercise to help in this regard will be a research paper that deals with one of the topics in the course. You should all think about developing a paper that could ultimately be published. For those thinking of choosing Urban and Regional as a field, you ought to be able to develop the foundations of at least one essay in a three essay dissertation. Indeed, I will offer a variety of suggestions that you may wish to pursue. Although both theoretical and empirical papers are possible, I expect and encourage most of you to consider empirical papers because this is my strength and this is usually a route most likely to help you finish the dissertation and land a good job. Furthermore, the ease of data acquisition offered by the internet makes this a much more plausible strategy than in the past.
Target Audience. This is a course primarily designed for doctoral students in economics who have had two years of doctoral training in microeconomics, macro, and econometrics. This background will be necessary to understand some of the literature in the course, but not all of it. For those who wish to take this class without such a strong background in economics, I will, when possible, consider additional readings and assignments that fit your own interests and background. I may also provide some additional readings for those planning to take the Ph.D. qualifying exams in urban and regional economics.
Class Format. I will lecture during most class sessions, but I expect substantial participation by all students in each and every class. My lectures will serve to introduce you to the literature on the topic, discuss connections among papers within the literature, and suggest ways in which the literature can be extended. Relatively little attention will be focused upon the actual derivation of many of the results and the details of estimators employed. I expect you to actively participate in each class and to do the readings for the class. In particular, you should be prepared to discuss these aspects of the readings assigned for each class: what are the main questions being asked; what are the major assumptions; and what are the main results.
EMAIL and Web Site. I will be available during office hours and by appointment. I also like to communicate via EMAIL on routine matters, so please send me your address as soon as possible. I will, in turn, send you all a list of the addresses of everyone in the class. Perhaps I will set up a listserve as well. I also expect to make my notes, course assignments, and some other information available on the class web site. Indeed, I hope each of you will make a contribution to the web site Vivian Huang and I are developing for Regional Economics. This can be in the form of new links, exercises or modules that can be used for graduate or undergraduate classes, and your own research papers.
Special Needs. Any student with special needs or learning disabilities should see me to discuss any special arrangements that may be necessary.
II. Evaluation of Course Performance
Your grade for the class will be based upon two exams, several assignments, class participation, and the research paper. The approximate weighting given to each component is as follows:
Participation 15 percent
Midterm 20 percent
Final 20 percent
Assignments 15 percent
Research Paper 30 percent
The exams will include an in class and a take-home component. The assignments will consist of problems from DiPasquale and Wheaton and other sources, literature surveys, and several brief in-class presentations. The literature surveys include a brief comparison and critique of several articles; I would expect them to be 5-10 pages. One of these must be devoted to one of the topics covered in this class. The second one may be geared to the topic of your research paper. I hope these can be placed on the web; I’ll explain what I have in mind.
Research Paper. I especially hope to be able to help you develop a research paper. This can be done during class and in one-on-one meetings outside of class.. Perhaps I can help you locate data or other literature that is related to the research you want to pursue for a paper. I may also be able to help in the selection of the best econometric techniques. The paper is due at the end of the semester, but extensions beyond the end of the semester are granted if you are making good progress. Usually, I will offer you a grade on any paper you submit with comments and suggestions about how it can be improved. For example, I may offer you a B and indicate what you would have to do to increase the grade to an A or A-. Whether you choose to make these improvements is up to you. You will be exposed to numerous ideas and potential topics in the readings and in our class. I strongly encourage you to do your own literature search on any of the topics you find interesting. I am open to a wide variety of topics for your papers as long as they fall under the general heading of housing market analysis and regional economics.
The research paper ought to have the same structure as the typical economics paper. You should state clearly the thesis of the paper and its contribution to the literature. A literature survey and the model underlying your tests should be included along with a description of the data to be employed. A separate section devoted to the empirical results is usually the centerpiece of the paper. The final section ought to highlight the major conclusions and suggestions for future research. A formal list of references and a title page are expected. Grading will be based upon the substance of the paper and the quality of the presentation, e.g. spelling, format, writing quality, tables, etc.
III. Schedule
The tentative schedule for the class follows. The full citations of the papers indicated in the schedule are provided in the next section. Most of the papers are on reserve. An * indicates the papers that you should read for the class; I will refer to the others during my lecture.
August 26 Housing Demand and Supply
*DiPasquale and Wheaton, Chs. 1-3
*Follain, "The Outlook for Owner-Occupied Housing in the Year 2000,"
Ermisch
Henderson and Ioannides, AER 1983 and JUE 1987.
Olsen
September 2 Asset Price Determination: Theoretical
*Alm and Follain
*DiPasquale and Wheaton, Ch. 3 (46-57).
*Mankiw and Weil
Poterba
Capozza and Sick
September 9 Asset Price Determination: Empirical
*Abraham and Hendershott
*Blackley and Follain, “An Econometric Model ....”
*DiPasquale and Wheaton, Chs. 8-10.
*Meese and Wallace
*Genoseve and Mayer
Blackley and Follain, “In Search ...”
Follain and Velz
Hendershott on Australia
Volume 7,2 of Journal of Housing Research is a special issue devoted to housing price movements.
Journal of Real Estate Finance and Economics, 14, 1 and 2, January/March 1997 is a special issue devoted to housing price indexes. Thomas Thibodeau was the editor of this special issue.
Capozza, Green, and Hendershott
Englehardt
Follain, Ling, and McGill
September 16 Demand for Mortgage Debt and Mortgage Choice
*Follain and Dunsky
*Brueckner, “The Demand for Mortgage Debt”
*Follain and Sturman
Follain and Ling;
Follain, Ling, and McGill;
Jones
*Brueckner and Follain
*Follain on “Mortgage Choice”
Berkovec and Fullerton
Nakagami and Pereira
Hendershott, LaFayette, and Haurin
Ling and McGill
Maki
Sinai
September 23 Options and Mortgages
Primer on Options (Check out any basic corporate finance or investments text book to learn the basic features and definitions of options, e.g. Brealey and Myers, Corporate Finance , Chs. 20-21, 3rd edition).
*Megbolugbe, Special Issue of Journal of Housing Research. The paper by Kau and Keenan is most important, but I will refer to several others, e.g. Shilling and Archer and Ling..
*Follain, Scott, and Yang
*Follain, Ondrich, and Sinha
September 30 Default Options and GSEs
*Vandell
*Kau, Keenan and Kim, 1994
*Kau and Keenan, “...Catastrophes..”
*Quigley and Van Order
Passmore and Sparks
Follain and Szymanoski on “A Framework”
Quercia and Stegman
Merton
October 7 Introduction to Regional Economics
*DiPasquale and Wheaton, Ch. 7
*Henderson, Ch. 1-2
Chinitz
Testa, Klier, and Mattoon
Treyz
October 14 System of Cities
*Henderson, Chs. 4,5, 8, and 10
Fujita and Thisse
October 21 Midterm #1 on Tuesday, October 21
October 28 New Regional Economics
*Krugman, Geography and Trade, Chs. 1-2.
*See Cityscape, Volume 1, No. 1, especially the paper by Glaeser.
Krugman
November 4 Economic Growth and Convergence
*Barro and Xali-Martin, Chs. 1-2
November 11 Endogenous Growth
*Barro and Xali-Martin, Chs. 4, 6, 9
Ortigueira and Santos
November 18 Empirical Tests of Regional Economic Growth
*Barro and Xali-Martin, Chs. 10-12
November 25 More Empirical Tests
Bartik
*Special Issue of the FRBNY Economic Policy Review
Henderson
*Ihlanfeldt
Oakland and Testa
Evans and Karras
December 2 More Empirical Tests
*Black and Henderson
*Ciccone and Hall
Jaffe, Trajtenberg, and Henderson
Morrison and Schwartz
*Rauch, “Does History Matter...”
Rauch, “Producitivity Gains...”
Smith
FINAL EXAM. FRIDAY, DECEMBER 12: 10:15 to 12:15 in Bowne 309.
IV. Readings
Four texts have been ordered for the course. These are:
Barro, Robert J. and Xavier Sala-I-Martin, Economic Growth, McGraw-Hill, 1995.
DiPasquale, Denise and William Wheaton, The Economics of Real Estate Markets, Prentice Hall, 1996.
Henderson, J.V., Urban Development, Oxford Press, 1988, Chs. 1-5 (SU Bookstore).
Krugman, Paul, Geography and Trade, MIT Press, 1991.
We will read substantial portions of each of these texts. You may also want to purchase an undergraduate Urban and Regional text. Professor Yinger and I use O’Sullivan’s book for Ecn 441 and can be obtained in bookstore. The text by Mills and Hamilton is another fine choice.
In addition, a number of articles, chapters, and papers have been assembled for this course. Most will be discussed during the class. This is by no means an exhaustive survey of all relevant literature; indeed, you will be asked to identify current literature not on this list that are relevant to the topics you are asked to discuss in class and your research paper.
Abraham, Jesse M., and Patric H. Hendershott, “Bubbles in Metropolitan Housing Markets: NBER WP No. 4774, June 1994.
Archer, Wayne and David C. Ling, “The Effect of Alternative Interest Rate Processes on the Value of Mortgage-Backed Securities,” Journal of Housing Research, Vol. 6, 1, 1995..
Bartik, Timothy, “Who Benefits from Local Job Growth: Migrants or the Original Residents,” Regional Studies, 27, 4.
Berkovec, James and Don Fullerton, “A General Equilibrium Model of Housing, Taxes, and Portfolio Choice,” Journal of Political Economy, 1992, 100, 2.
Black, Duncan and Vernon Henderson, “Urban Growth,” Working Paper 97-1, Brown University Department of Economics, 1997.
Brueckner, Jan K., “The Demand for Mortgage Debt: Some Basic Results,” Journal of Housing Economics, 3, 251-262, 1994.
Capozza, Dennis, and Gordon Sick, “The Risk Structure of Land Markets,” Journal of Urban Economics, 35, 297-319, 1994.
Capozza, Dennis R. , Richard Green, and Patric H. Hendershott, “Taxes, Mortgage Borrowing, and Residential Land Prices,” Ch. 5 in Fundamental Tax Reform, ed. Henry Aaron, Brookings, 1996.
Chinitz, Benjamin, “Contrasts in Agglomeration: New York and Pittsburgh,” in Urban and Regional Economics edited by Evans, Alan, and Paul C. Cheshire, An Elgar Reference Collection, 1991.
Ciccone, Antionio and Robert E. Hall, “Productivity and the Density of Economic Activity,” AMERICAN ECONOMIC REVIEW, 86, 1.
Cityscape, Volume 1, Number 1, Proceedings of the Regional Growth and Community Development Conference, November 1993, Washington, D.C.; edited by James Follain and John Ross.
Cityscape, Volume 1, Number 2, June 1995, edited by Michael Stegman.
Engelhardt, Gary V. , “House Prices and Home Owner Saving Behavior,” NBER Paper No. 5183, July 1995.
Ermisch, John, “The Demand for Housing in Britain and Population Ageing: Microeconometric Evidence,” Economica, 63, 383-404, 1996.
Evans, Paul and Georgios Karras, “Do Economies Converge? Evidence from a Panel of US States,” Review of Economics and Statistics, Dec. 1996.
Federal Reserve Bank of New York, Economic Policy Review, February 1997, Volume 3, 1; Special Issue on the Metropolitan Economy in the National and World Arenas. Available on the web at the FRB of NY web site.
Fujita, Masahisa, and Jacques-Francois Thisse, “Economics of Agglomeration,” Journal of Japanese and International Economics, Dec. 1996.
Genesove, David and Christopher J. Mayer, “Equity and Time to Sale in the Real Estate Market,” American Economic Review, June 1997.
Glaeser, Edward, “Cities, Information, and Economic Growth,” Cityscape, Vol. 1, 9-48, 1994.
Green, Richard K., Stephen Malpezzi, and Kerry Vandell, “Urban Regulations and the Price of Land and Housing in Korea,” Journal of Housing Economics, 3, 330-356, 1994.
Hendershott, Patric H., “Rental Adjustment and Valuation of Real Estate in Overbuilt Markets: Fundamental vs Reported Office Market Values in Sydney, Australia,” NBER Paper. No. 4775, June 1994.
Hendershott, Patric H., William C. LaFayette, and Donald Haurin, "Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs," Journal of Urban Economics, March 1997, 202-217. NR
Henderson, J.Vernon, “Where Does an Industry Locate?” Journal of Urban Economics, 35, 1994, 83-104.
Henderson, J.V. and Y.M. Ioannides, “A Model of Housing Tenure Choice,” American Economic Review, March 1983.
Henderson, J.V. and Y.M. Ioannides, “Owner Occupancy: Investment v Consumption,” Journal of Urban Economics,” 21, 228-241, 1987.
Ihlanfeldt, Keith, “The Importance of the Central City to the Regional and National Economy: A Review of the Arguments and Empirical Evidence,” Cityscape, Volume 1, Number 2. pp. 125-150.
Jaffe, Adam, Manuel Trajtenberg, and Rebecca Henderson, “Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations,” Quarterly Journal of Economics, August 1993.
Jones, Lawrence, “The Demand for Home Mortgage Debt,” Journal of Urban Economics, 33, 10-28, 1993.
Journal of Housing Research, Special Issue on House Price Indices, 7, 2, 1996, edited by Isaac F. Megbolugbe.
Kau, James B., and Donald C. Keenan, “An Option-Theoretic Model of Catastrophes Applied ot Mortgage Insurance,” The Journal of Risk and Insurance, 1996, 63, 4, 639-656. (NR)
Kau, James, B.,, Donald C. Keenan, Taewon Kim, “Transaction Costs, Suboptimal Termination, and Default Probabilities,” Journal of the American Real Estate and Urban Economics Association, 1993, 21, 247-263.
Kau, James B., Donald C. Keenan, and Taewon Kim, “Default Probabilities for Mortgages,” Journal of Urban Economics, 25, 278-296, 1994.
Krugman, Paul, “Increasing Returns, Monopolistic Competition, and International Trade, Journal of International Economics, November 1979.
Ling, David C. and Gary A. McGill, “Evidence on the Demand for Mortgage Debt by Owner-Occupants,” Paper Presented at the 1997 Mid-Year Meetings of the American Real Estate and Urban Economics Association, Washington D.C.
Maki, Dean M., “Household Debt and the Tax Reform Act of 1996,” Center for Economic Policy Research, CEPR Pub. No. 436, November 1995.
Mankiw, N. Gregory and David N. Weil, “The Baby Boom, the Baby Bust, and the Housing Market,” Regional Science and Urban Economics, 19, 235-258, 1989.
Meese, Richard, and Nancy Wallace, “Testing the Present Value Relation for Housing Prices: Should I Leave My House in San Francisco?”, Journal of Urban Economics, 35, 3, May 1994, 245-266. NR
Megbolugbe, Isaac F., Editor of Special Issue: Research Issues in Pricing Mortgage-Backed Securities,” Journal of Housing Research, Vol. 6, 1, 1995.
Merton, Robert C., and Zvi Bodie, “On the Management of Financial Guarantees,” Financial Management, Winter 1992, 87-108.
Morrison, Catherine and Amy Schwartz, “State Infrastructure and Productive Performance,” AMERICAN ECONOMIC REVIEW, September 1996.
Nakagami, Yasuhiro, and Alfredo M. Pereira, “Budgetary and Efficiency Effects of Housing Taxation in the U.S.,” Journal of Urban Economics, 39, 68-86, 1996.
Nakamura, Ryohei, “Agglomeration Economies in Urban Manufacturing Industries: A Case of Japanese Cities,” Journal of Urban Economics, 17, 1995.
Oakland, William and William Testa, “Community Development-Fiscal Interactions: Theory and Evidence from the Chicago Area,” Regional Economic Issues (working paper series), Federal Reserve Bank of Chicago, 1995, WP 1995/7.
Olsen, Edgar O. "The Demand and Supply of Housing Service: A Critical Survey of the Empirical Literature," Handbook of Regional and Urban Economics, vol. 2, Edited by E.S. Mills, ch. 25, 1987. NR
Ortigueira, Salvador and Manuel S. Santos, “On the Speed of Convergence in Endogenous Growth Models,” American Economic Review, June 1997, 383-399.
Passmore, Wayne, Roger Sparks, “Putting the Aqueeze on a Market for Lemons: Government-Sponsored Mortgage Securitization,” Journal of Real Estate Finance and Economics, 13, 27-43, 1996. (NR)
Poterba, James, “Tax Subsidies to Owner-Occupied Housing: An Asset Market Approach,” Quarterly Journal of Economics, November 1994.
Quercia, Roberto G., and Michael A. Stegman, “Residential Mortgage Default: A Review of the Literature,” Journal of Housing Research, 3, 2, 1992341-380. (NR)
Quigley, John, and Robert Van Order, “Defaults on Mortgage Obligations and Capital Requirements for US Savings Insitutions,” Journal of Public Economics, 44, 1991, 353-369. (NR)
Rauch, James, “Does History Matter Only When It Matters Little? The Case of City-Industry Location,” Quarterly Journal of Economics, 1993.
Rauch, James, “Productivity Gains from Geographic Concentration of Human Capital: Evidence from Cities,” Journal of Urban Economics, 34, 1993, 380-400.
Shilling, James, “Rates of Return on Mortgage-Backed Securities and Option-Theoretic Models of Mortgage Pricing,” Journal of Housing Research, Vol. 6, 1, 1995.
Sinai, Todd, “Taxation, Mobility, and the Demand for Owner-Occupied Housing,” unpublished manuscript, November 1996, MIT.
Smith, Donald, “Agglomeration and Industrial Location: An Econometric Analysis of Japanese-Affiliated Manufacturing Establishments in Automotive-Related Industries,” Journal of Urban Economics, 36, 1994, 23-41.
Testa, William, Thomas Klier, and Richard, Mattoon, “Reversal of Fortune: Understanding and Midwest Recovery,” Economic Perspectives, Federal Reserve Bank of Chicago, July/August 1997.
Treyz, George, Regional Economic Modeling: A Systematic Approach to Economic Forecasting and Policy Analysis, Kluwer Academic Publishers, 1993.
Vandell, Kerry, “How Ruthless is Mortgage Default? A Review and Synthesis of the Evidence,” Journal of Housing Research, Vol. 6, 1, 1995.
I have also assembled a number of papers done by me and other colleagues that are particularly relevant to some of the topics we will be discussing. These will provide you with a good sense of my own interests and expertise. I would be pleased to discuss the many ways in which these papers can be improved and extended. Most of these are on reserve.
Alm, James and Follain "Shocks and the Valuation of Residential Real Estate," Journal of Urban Economics, 36, 2 September 1994: 117-142.
Blackley and Follain "An Econometric Model of the Metropolitan Housing Market,", Journal of Housing Economics, I(2) 1991: 140-167.
Blackley and Follain, "In Search of Empirical Evidence that Links Rent and User Cost," NBER Working Paper #5177, July 1995.
Brueckner, Jan K., and Follain, "ARMs and the Demand for Housing," Regional Science and Urban Economics, 19(2), 1989: 163?187.
Follain, "Some Possible Directions for Research on Multifamily Research,"5, 4, 533-568, Housing Policy Debate, 1994, Fannie Mae, Washington, D.C.
Follain and Orawin Velz, "Incorporating the Number of Existing Home Sales into a Structural Model of the Market for Owner-Occupied Housing," Journal of Housing Economics, 4, 93-117, June 1995.
Follain, James R., "The Outlook for Owner-Occupied Housing in the Year 2000," in Upheaval in Urban Housing Markets, Frank Bonnello and Tom Swartz (eds.), Sharpe Press, 1993: 79-106.
Follain, and David C. Ling, “The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction,” National Tax Journal, June 1991, 147-168.
Follain, James and David C. Ling, and Gary McGill, “The Preferential Income Tax Treatment of Owner-Occupied Housing: Who Really Benefits?”, Housing Policy Debate, 4, 1, 1993, 1-42.
Follain, Patric H. Hendershott, and David C. Ling, “Understanding the Real Estate Provisions of Tax Reform: Motivation and Impact,” National Tax Journal, XL, 3, 363-372.
Follain, "Mortgage Choice," American Real Estate and Urban Economics Association Journal, 18(2), Summer 1990: 125-144.
Follain, James and Robert Dunsky, “The Demand for Home Mortgage Debt,”, Journal of Housing Research, forthcoming.
Follain, Louis Scott, and Tyler Yang "Microfoundations of a Mortgage Prepayment Function," Journal of Real Estate Finance and Economics, 5 1992: 197-217.
Follain, Jan Ondrich, and Gyan P. Sinha, “Ruthless Prepayment? Evidence from Multifamily Mortgages,” Journal of Urban Economics, January 1997.
Blackley, Dixie M. and James R. Follain, In Search of Empirical Evidence that Links Rent and User Cost,” NBER Paper . 5177 (Also in Regional Science and Urban Economics), July 1995.
Follain, James R. and Edward J. Szymanoski, “A Framework for Evaluating Government’s Evolving Role in Multifamily Mortgage Markets,” Cityscape, Volume 1, No. 2, 151-178.
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