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Signature Redacted Essays on the Functioning of Housing and Labor Markets by Christopher John Palmer B.A. Economics; B.S. Mathematics, Brigham Young University (2008) Submitted to the Department of Economics in partial fulfillment of the requirements for the degree of MAssACHUSETS INSTMrE! OFTECHNOLOGY Doctor of Philosophy at the JUN 1 1 201I MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 2014 LIBRARIES @ 2014 Christopher John Palmer. All rights reserved. The author hereby grants to MIT permission to reproduce and distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature redacted Author ............ .... , ......................................................... De a~mrtment~ cf Eri~ i~~ - pl i 11111 s Signature redacted May 15, 2014 Certified by. .......................... David Autor Professor of Economics Signature redacted Thesis Supervisor Certified by.. !j4 Jerry Hausman John and Jennie S. MacDonald Professor of Economics Signature redacted Thesis Supervisor Certified by.. Parag Pathak Professor of Economics Signature redacted Thesis Supervisor Certified by. ....................... William Wheaton Professor of Economics Signature redacted Thesis Supervisor Accepted by Michael Greenstone 3M Professor of Economics Chairman, Departmental Committee on Graduate Studies Essays on the Functioning of Housing and Labor Markets by Christopher John Palmer Submitted to the Department of Economics on May 15, 2014, in partial fulfillment of the requirements for the degree of Doctor of Philosophy Abstract The first chapter consists of my job-market paper. The foreclosure rate of subprime mortgages increased markedly across 2003-2007 borrower cohorts-subprime mortgages originated in 2006- 2007 were roughly three times more likely to default within three years of origination than mortgages originated in 2003-2004. Many have argued that this surge in subprime defaults represents a deterioration in subprime lending standards over time. I quantify the importance of an alternative hypothesis: later cohorts defaulted at higher rates in large part because house price declines left them more likely to have negative equity. Using loan-level data, I find that changing borrower and loan characteristics explain approximately 30% of the difference in cohort default rates, with almost of all of the remaining heterogeneity across cohorts attributable to the price cycle. To account for the endogeneity of prices, I employ a nonlinear instrumental-variables approach that instruments for house price changes with long-run regional variation in house-price cyclicality. Control function results confirm that the relationship between price declines and defaults is causal and explains the majority of the disparity in cohort performance. I conclude that if 2006 borrowers had faced the same prices the average 2003 borrower did, their annual default rate would have dropped from 12% to 5.6%. The second chapter is joint with David Autor and Parag Pathak. Externalities from the attributes and actions of neighborhood residents onto the value of surrounding properties and neighborhoods are central to the theory of urban economics and the development of efficient housing policy. This paper measures the capitalization of housing market externalities into residential housing values by studying the sudden and largely unanticipated 1995 elimination of stringent rent controls in Cambridge, Massachusetts, which had previously muted landlords' incentives to invest in their properties and altered the assignment of residents to locations. Pooling administrative data on the universe of assessed values and transacted prices of all Cambridge residential properties between 1988 and 2005, we find that rent decontrol genrated substantial, robust price appreciation at decontrolled units and nearby never-controlled units, accounting for an estimated 30 percent of the $7.8 billion in Cambridge residential property appreciation during this period. The majority of this contribution is due to induced appreciation of never-controlled properties, while residential investments can explain only a small fraction of the total. The third chapter is joint with Denis Chetverikov and Bradley Larsen. We present a methodology for estimating the distributional effects of an endogenous treatment that varies at the group level when there are group-level unobservables, a quantile extension of Hausman and Taylor (1981). Standard quantile regression techniques are inconsistent in this setting, even if the treatment is exogenous. Using the Bahadur representation of quantile estimators, we derive weak conditions 3 on the growth of the number of observations per group that are sufficient for consistency and asymptotic normality. Simulations confirm the superiority of this grouped instrumental variables quantile regression estimator to standard quantile regression. An empirical application finds that low-wage earners in the U.S. from 1990-2007 were significantly more affected by increased Chinese import competition than high-wage earners. We also illustrate the usefulness of the estimation approach with additional empirical examples from urban economics, labor, regulation, and empirical auctions. Chapter 1 Keywords: Mortgage Finance, Subprime Lending, Foreclosure Crisis, Negative Equity Chapter 2 Keywords: Urban Economics, Residential Externalities, Rent Control, Price Regula- tions Chapter 3 Keywords: Quantile Regression, Instrumental Variables, Panel Data, Wage Inequality, Import Competition Chapter 1 JEL Classification: GOl, G21, R31, R38 Chapter 2 JEL Classification: D61, H23, R23, R31, R32, R38 Chapter 3 JEL Classification: C21, C31, C33, C36, J30 Thesis Supervisor: David Autor Title: Professor of Economics Thesis Supervisor: Jerry Hausman Title: John and Jennie S. MacDonald Professor of Economics Thesis Supervisor: Parag Pathak Title: Professor of Economics Thesis Supervisor: William Wheaton Title: Professor of Economics 4 Contents 1 Why Did So Many Subprime Borrowers Default During the Crisis: Loose Credit or Plummeting Prices? 13 1.1 Introduction ....................... .................. 13 1.2 Empirical Strategy ........... ..................................... 21 1.2.1 Hazard M odel Specification ............................ 21 1.3 Data and Descriptive Statistics ....................... ....... 23 1.4 Estim ation and Identification ....... ... 26 1.4.1 E stim ation .. .............. ............. ........ 26 1.4.2 Identification ... .............. .............. ..... 28 1.4.3 Isolating Long-Run Variation in Housing Price Cycles ........... .. 31 1.5 R esults .. ............................. ............. 33 1.5.1 Results Treating Price Changes as Exogenous .................. 33 1.5.1.1 Unobserved Heterogeneity ....................... 35 1.5.2 Nonlinear Instrumental Variables Estimation ................. 36 1.5.2.1 First Stage ............. ............ ....... 38 1.5.2.2 Exclusion Restriction ......... ........ ......... 40 1.5.2.3 Control Function Results ....... ........ ......... 41 1.6 M echanism s ... ............... ............... ........ 45 1.6.1 Instrumenting for Loan-to-Value Ratios .. .............. ..... 48 5 1.7 Estimating Counterfactual Default Rates ... .. ... .. .. ... .. ... .. .. 52 1.8 Conclusion .. .. ... .. ... .. ... .. ... .. ... .. .. .. ... .. 54 2 Housing Market Spillovers: Evidence from the End of Rent Control in Cam- bridge Massachusetts 75 2.1 Cambridge Rent Control: Enactment, Enforcement, and Removal .. .. .. .... 81 2.1.1 Rent control adoption and elimination . .. .. .. .. .. .. .... 81 2.1.2 The post decontrol regime .. .. .. .. .. .. .. .. .. 83 2.2 The Direct and Indirect Effects of Rent Control . .. .. .. .. .. .... 85 2.3 Data and Measurement . .. .. .. .. .. .. .. .. .. .. .. .... 87 2.3.1 Cambridge real estate . .. .. .. .. .. .. .. .. .. ... 87 2.3.2 Measuring rent control intensity (RCI) .. .. .. .. .. .. .. .... 89 2.4 Capitalized Effects of Rent Decontrol: Evidence from Assessments . .. .. 91 2.4.1 Appreciation of decontrolled properties . .. .. .. .. .. 93 2.4.2 Direct and indirect effects of rent decontrol . .. .. .. .. .. .. .. 94 2.4.3 Variation across property types .. .. .. .. .. .. .. .. .... 96 2.4.4 Testing alternative measures of rent control intensity .. .. .. .... 98 2.5 The Time Path of Rent Decontrol Capitalization .. .. .. .. .. ... 101 2.6 The Impact of Rent Decontrol on Property Investments . .. .. .. ... 104 2.7 The Capitalized Value of Rent Decontrol in Cambridge .. .. .. .. .... 105 2.8 C onclusion . .. .. .. .. .. .. .. .. .. .. .. .. .. .... 107 3 IV Quantile Regression for Group-level Treatments, with an Application to the Effects of Trade on the Distribution of Wages 151 3.1 Introduction . .. .. .. .. .. .. .. .. .. ... ... - . ... 151 . 3.2 M odel .. .. .. .. .. .. .. .. .. .. .. .. ... ... ... ... 156 3.3 Examples of Grouped IV Quantile Regression . .. .. .. .. .. .. .. .. 158 6 3.4 Estimator .. .. ... .. .. ... .. .. .. ... .. .. .. ... .. .. .. ... 162 3.5 Asymptotic Theory .. .. .. ... .. .. .. ... .. .. .. ... .. .. ... .. 164 3.5.1 Assumptions .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 165 3.5.2 Results . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 166 3.6 Simulations .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 170 3.7 The effect of Chinese import competition on the distribution of local wages . .. .. .. .. .. .. .. .. .. .. .. .. .. 174 3.7.1 Background on wage inequality . .. .. .. ... .. .. .. .. .. .. ... 174 3.7.2 Framework of Autor, Dorn, and Hanson (2013) . .
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