Abstract
Neighborhood amenities, including public services, vary across locations, and a well-known theorem says that households with a higher marginal willingness to pay (MWTP) for an amenity sort into locations where the amenity is better. A higher MWTP is equivalent to a steeper bid function for the amenity, and the housing price function, which is the envelope of the household bid functions, reflects this sorting process. This paper derives equilibrium expressions for the amenity level as a function of a household’s relative MWTP under the assumption of one-to-one matching between household classes and amenity levels.
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