Real Estate

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of "human wealth," the present discounted value of future labor income. I present an explicitly solved model to deliver this widely-noted consumption property by specifying that the conditional variance of changes in income increases with its level.

We develop a dynamic incomplete-markets model where an entrenched insider, facing imperfect investor protection and non-diversifiable illiquid business risk, makes interdependent consumption, portfolio choice, expropriation, corporate investment, ownership, and business exit decisions.

Design competitions are commissioned for many reasons, almost none of which have to do with design and all of which have to do with political motivations. A political agenda always presides over the important but ancillary search for new design possibilities, innovative solutions, or a compelling architectural or urban vision. Though political agendas vary quite a lot, they are lodged in the fundamental need to create or cultivate a strong constituency and garner the necessary resources to advance a desired project.

This paper provides a model of investment timing by managers in a decentralized firm in the presence of agency conflicts and information asymmetries. When investment decisions are delegated to managers, contracts must be designed to provide incentives for managers to both extend effort and truthfully reveal private information. Using a real options approach, we show that an underlying option to invest can be decomposed into two components: a manager's option and an owner's option. The implied investment behavior differs significantly from that of the first-best no-agency solution.

For the the past several years, Chicken Littles have squawked that the sky is about to fall on the housing market. And it's tempting to believe them. The market sure feels like a bubble: The rampant growth of house prices over the past decade, the rising price of houses relative to rent and the astonishing gap in many cities between price and income are almost unprecedented in recent history. The last time things felt this way, in the late 1980s, real house prices subsequently dropped by one-third in cities like Boston and Los Angeles.

How does one tell when rapid growth in house prices is caused by fundamental factors of supply and demand and when it is an unsustainable bubble? In this paper, we explain how to assess the state of house prices - both whether there is a bubble and what underlying factors support housing demand - in a way that is grounded in economic theory. In doing so, we correct four common fallacies about the costliness of the housing market.

Lynne Sagalyn's chapter from Contentious City reviews the emotionally charged planning for the redevelopment of the WTC site between September 2001 and the end of 2004. Though we do not yet know how these plans will be realized, we can nonetheless examine how the initial plans emerged—or were extracted—from competing ambitions, contentious turf battles, intense architectural fights, and seemingly unresolvable design conflicts.

I propose an intertemporal precautionary saving model in which the agent's labor income is subject to (possibly correlated) shocks with different degrees of persistence and volatility. However, he only observes his total income, not individual components. I show that partial observability of individual components of income gives rise to additional precautionary saving due to estimation risk, the error associated with estimating individual components of income. This additional precautionary saving is higher, when estimation risk is greater.

We examine two factors that explain air traffic congestion: network benefits due to hubbing and congestion externalities. While both factors impact congestion, we find that the hubbing effect dominates empirically. Hub carriers incur most of the additional travel time from hubbing, primarily because they cluster their flights in short time spans to provide passengers as many potential connections as possible with a minimum of waiting time. Non-hub flights at the same hub airports operate with minimal additional travel time.