Land, housing, growth and inequality

This paper incorporates productive assets, residential land and residential structures in a growth model with two social classes: capitalists, who invest in productive assets and housing but do not work, and workers, who invest only in housing and decide on their labor effort. It is shown that the relative price of land grows in the long run at the same rate as the economy’s GDP, while the quantity of housing services and their price grow slower than it. Moreover, numerical examples show that (i) shifting taxation away from income and towards the property of land enhances long-term GDP growth and leads in the long-run to more equalitarian (more favorable to workers) income and wealth distributions, (ii) a marginal increase in the fraction of investment expenditures in residential structures that is tax deductible reduces income and wealth inequality, (iii) a change in preferences giving more weight in the utility function to residential services leads in the long run to a distribution of income and wealth more favorable to capitalists, (iv) changes in taxation or in preferences increasing the fraction of total investment devoted to the accumulation of residential wealth rather than to the accumulation of productive assets brings about a balanced growth path characterized by a higher wealth-income ratio. Finally, endogenous fluctuations may be generated along the equilibrium trajectory converging to the balanced growth path, in a model where housing wealth and residential land are distinguished from productive capital and only fundamentals (initial endowments, preferences and technologies) drive the economy.