Equilibrium and migration in dynamic models of housing markets

This paper presents a model of a regional housing market where households choose among competing employment opportunities offered by cities within a given system. The equilibrium requirement imposed in the model requires that households be indifferent among all locations both within their current city and other cities within the region, rather than in terms of exogenously determined utility or populations. This construction allows the characterization of equilibrium in terms of potentially observable variables related to household income. Given that equilibrium can be defined in this more general manner, it is natural to identify ways in which the predictions will differ from those generated by existing models. Capozza and Helsley's (J. Urban Econ. 28 (1990) 180-203) model of land conversion is evaluated in this context. In this setting, the option value associated with the ability to delay development depends directly on the degree to which the income processes are correlated across cities. Also, increased idiosyncratic income risk does not necessarily lead to larger option values. (C) 2004 Elsevier Inc. All rights reserved.