Partial Identification of Preferences in a Dual-Market Sorting Equilibrium

ABSTRACT: This paper develops a new structural estimator that uses the properties of market equilibrium, together with information on households and their observed location choices, to partially identify horizontally differentiated preferences for a vector of local public goods. The estimation is consistent with equilibrium capitalization of local public goods and recognizes that job and house location choices are interrelated. By using set identification to distinguish the identifying power of restrictions on the indirect utility function from the identifying power of assumptions on the distribution of preferences, the estimator provides a new perspective on models of sorting equilibria. The estimator is used to recover distributions of the marginal willingness-to-pay for improved air quality in Northern California’s two largest population centers: the San Francisco and Sacramen-to metropolitan areas. The average marginal willingness-to-pay increases by up to 110% when job opportunities are included as a dimension of location choice