Das House Kapital

June 29, 2021

By Volker Grossmann, Benjamin Larin and Thomas Steger


The housing wealth-to-income ratio has been increasing in most developed economies since the 1950s. We provide a novel theory to explain this long-term pattern. We show analytically that house prices grow in the steady state if i) the housing sector is more land-intensive than the non-housing sector. Despite growing house prices and housing wealth, the housing wealth-to income ratio is constant in steady state. We hence study the dynamics in the housing wealth-to-income ratio by computing transitions. The model is calibrated separately to the US, UK, France, and Germany. On average, we replicate 89 percent of the observed increase in the housing wealth-to-income ratio. The key for replicating the data is the differentiation between residential land as a non-reproducible factor and residential structure as reproducible factor. The transition process from the calibrated model points to two driving forces of an increasing housing wealth-to-income ratio: i) A long-lasting construction boom that brought about a pronounced build-up in the stock of structures and ii) an increase in the demand for residential land that resulted in surging residential land prices.

You heard the complaints that housing prices are increasing everywhere and that housing takes a too large portion of total expenses. And this is not a recent phenomenon. This paper lays out neatly a model with just the right ingredient to study this. The answer is powerful yet subtle: it is all in the dynamics.


Universal Basic Income: A Dynamic Assessment

June 27, 2021

By Diego Daruich and Raquel Fernández


The idea of universal basic income (UBI)—a set income that is given to all without any conditions—is making an important comeback but there is no real evidence regarding its long-term consequences. This paper provides a very inexpensive evaluation of such a policy by studying its dynamic consequences in a general equilibrium model with imperfect capital markets and labor market shocks, in which households make decisions about education, savings, labor supply, and with intergenerational linkages via skill formation. The steady state of the model is estimated to match US household data. We find that a UBI policy that gives all households a yearly income equivalent to the poverty line level has very different welfare implications for those alive when the policy is introduced relative to future generations. While a majority of adults (primarily older non-college workers) would vote in favor of introducing UBI, all future generations (operating behind the veil of ignorance) would prefer to live in an economy without UBI. The expense of the latter leads to lower skill formation and education, requiring even higher tax rates over time. Modeling automation as an increased probability of being hit by an “out-of-work” shock, the model is also used to provide insights on how the benefits of UBI change as the environment becomes riskier. The results suggest that UBI may be a useful transitional policy to help current individuals whose skills are more likely to become obsolete and are unprepared for the increased risk, while, simultaneously, education policies may be implemented to increase the likelihood that future cohorts remain productive and employed.

My own experience has been that it is extremely difficult to justify UBI, its financing is simply too distorting for its limited, untargeted benefits. This paper adds endogenous education to the mix actually finds some people that would like to enjoy UBI, but they make it worse for future generations (who of course do not have a vote). The paper also shows that UBI is not a cure-all that can replace all other policies. Targeted policies are still needed.