A model for residential supply

Abstract

The release of agricultural land for urban use by landowners, the development of this land into urbanized land lots by land developers and the construction of buildings by housing developers is a complex multistage process which we study and model as a chain of sub-markets. The theoretical complexity comes from the interaction between supply agents at each stage, the existence of a natural monopoly associated with a location externality such as agglomeration, access and neighborhood advantages and the spatial context of this linked market. Analytical models are derived for each supplier agent type, assuming they behave stochastically. We apply the maximum entropy framework to generate models consistent with discrete choice theory. The cases of perfect and imperfect competition are considered, along with constrained and unconstrained supply. The usual economic properties required for deterministic models are demonstrated to hold here. The calibration of parameters is discussed and equilibrium equations for quantity and prices are derived. Thus, this new model can be conceived as a key tool in an overall land use model, providing a detailed and economically consistent description of the supply side. With this enhancement, a land use equilibrium is established on more solid ground.