Abstract
In the wake of China's great migration, many cities, including Beijing and Shanghai, restrict some residents from owning housing, forcing them to rent. We build a model studying motivations for and effects of ownership-restricting policies. When some agents are prohibited from purchasing housing, competitive equilibrium further punishes renters, failing to attain a second-best that maximizes welfare subject to the policy's intended constraint. We then consider real estate taxation, a hotly debated topic in China, currently undergoing reform. We show that positive taxes on housing transactions can help mitigate the inefficiency caused by restricted ownership, but only by introducing a new distortion. Meanwhile, subsidizing rental transactions could, in theory, restore the second-best, but only by diverting public funds away from other uses.
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