nep-ure New Economics Papers
on Urban and Real Estate Economics
Issue of 2012‒02‒27
twenty-six papers chosen by
Steve Ross
University of Connecticut

  1. The Size Distribution Across All "Cities": A Unifying Approach By Giesen, Kristian; Suedekum, Jens
  2. Can the Mortensen-Pissarides Model Match the Housing Market Facts? By Gaetano Lisi
  3. Family money, relational life and (class) relative wealth: an empirical analysis on life satisfaction of secondary school students By Becchetti, Leonardo; Pisani, Fabio
  4. A Bayesian Spatial Individual Effects Probit Model of the 2010 U.K. General Election By Christa Jensen; Donald Lacombe; Stuart McIntyre
  5. Overeducation and spatial flexibility in Italian local labour markets By Giuseppe Croce; Emanuela Ghignoni
  6. Tax competition among local governments: evidence from a property tax reform in Finland By Teemu Lyytikäinen
  7. Peer Heterogeneity, School Tracking and Students’ Performances: Evidence from PISA 2006 By Michele Raitano; Francesco Vona
  8. The Way Forward: U.S. Residential Mortgage Finance in a Post-GSE World By Lawrence J. White
  9. A Slab in the Face: Building Quality and Neighborhood Effects By Rainer Schulz; Martin Wersing
  10. A participative procedure to select indicators of policies for sustainable urban mobility. Outcomes of a national test. By Marletto, Gerardo; Mameli, Francesca
  11. Gateway cities and urbanisation in southeast asia before world war II By Gregg Huff
  12. School inspections: can we trust Ofsted reports? By Iftikhar Hussain
  13. Heterogeneity in the Cultural Expenditures of Municipalities Evidence from Italian Data (1998-2006) By Domenico Depalo; Silvia Fedeli
  14. Effects of One-Sided Fiscal Decentralization on Environmental Efficiency of Chinese Provinces By Hang XIONG
  15. “What attracts knowledge workers? The role of space, social connections, institutions, jobs and amenities” By Ernest Miguélez; Rorina Moreno
  16. Land use dynamics and the environment. By Carmen Camacho; Agustín Pérez-Barahona
  17. Strategic Interactions in Environmental Regulation Enforcement: Evidence fromChinese Provinces By Mary-Françoise RENARD; Hang XIONG
  18. Long-term effects of class size By Fredriksson, Peter; Öckert, Björn; OOsterbeek, Hessel
  19. The Causal Effects of an Industrial Policy By Chiara Criscuolo; Ralf Martin; Henry G. Overman; John Van Reenen
  20. Why do some employers prefer to interview Matthew but not Samir? New evidence from Toronto, Montreal and Vancouver By Dechief, Diane; Oreopoulos, Philip
  21. The Short-Term Effectiveness of a Remedial Mathematics Course: Evidence from a UK University By Di Pietro, Giorgio
  22. Urban Trends and Policies in OECD Countries By Lamia Kamal-Chaoui; Javier Sanchez-Reaza
  23. Peer Effects in Pro-Social Behavior: Social Norms or Social Preferences? By Gächter, Simon; Nosenzo, Daniele; Sefton, Martin
  24. Pupils' progress: how children's perceptions influence their efforts By Amine Ouazad; Lionel Page
  25. Decentralized Fiscal Federalism Revisited: Optimal Income Taxation and Public Goods under Horizontal Leadership By Aronsson, Thomas; Persson, Lars
  26. Combining Monte Carlo Simulations and Options to Manage the Risk of Real Estate Portfolios By Amédée-Manesme, Charles-Olivier; Baroni, Michel; Barthélémy, Fabrice; Dupuy, Etienne

  1. By: Giesen, Kristian (University of Duisburg-Essen); Suedekum, Jens (University of Duisburg-Essen)
    Abstract: In this paper we show that the double Pareto lognormal (DPLN) parameterization provides an excellent fit to the overall US city size distribution, regardless of whether "cities" are administratively defined Census places or economically defined area clusters. We then consider an economic model that combines scale-independent urban growth (Gibrat's law) with endogenous city creation. City sizes converge to a DPLN distribution in this model, which is much better in line with the data than previous urban growth frameworks that predict a lognormal or a Pareto city size distribution (Zipf's law).
    Keywords: Zipf's law, Gibrat's law, city size distributions, double Pareto-Lognormal
    JEL: R11 R12 O4
    Date: 2012–02
  2. By: Gaetano Lisi
    Abstract: This paper examines whether the Mortensen-Pissarides matching model can account for the housing markets facts, most of all the empirical anomaly known as ‘price dispersion’. Our main finding is that the model can account for the three basic facts of housing market, without any restrictive assumption and in a very simple framework.
    Keywords: House prices, time-on-the-market, housing price dispersion, bargaining power, search and matching frictions.
    JEL: R0 R31 R21 D40 D83
    Date: 2012–01–01
  3. By: Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Pisani, Fabio (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: We investigate factors affecting happiness on a sample of Italian secondary school students. We find that money matters since family’s house ownership, mortgages and (class) relative wealth significantly affect life satisfaction. Other crucial factors are geographical residence (those living in Milan are significantly less happy), mother’s occupation, trust on family and friendships. Even though we cannot rule out inverse causality and other forms of endogeneity, the characteristics of many of the significant regressors such as family wealth, parental job and geographical residence (not under the decisional power of the student) suggest a direct causality nexus for these factors.
    Keywords: life satisfaction; secondary school; wealth
    JEL: E01 I31
    Date: 2012–02–08
  4. By: Christa Jensen (Regional Research Institute, Department of Economics, West Virginia University); Donald Lacombe (Regional Research Institute, West Virginia University); Stuart McIntyre (Department of Economics, University of Strathclyde)
    Abstract: The Conservative Party emerged from the 2010 United Kingdom General Election as the largest single party, but their support was not geographically uniform. In this paper, we estimate a hierarchical Bayesian spatial probit model that tests for the presence of regional voting effects. This model allows for the estimation of individual region-specific effects on the probability of Conservative Party success, incorporating information on the spatial relationships between the regions of the mainland United Kingdom. After controlling for a range of important covariates, we find that these spatial relationships are significant and that our individual region-specific effects estimates provide additional evidence of North-South variations in Conservative Party support.
    Keywords: United Kingdom General Election, Bayesian hierarchical modelling, spatial econometrics
    JEL: C11 C21
    Date: 2011–11
  5. By: Giuseppe Croce; Emanuela Ghignoni
    Abstract: According to a recent strand of literature this paper highlights the relevance of spatial mobility as an explanatory factor of the individual risk of being overeducated. To investigate the causal link between spatial mobility and overeducation we use individual information about daily home-to-work commuting time and choices to relocate in a different local area to get a job. In our model we also take into account relevant local labour markets features. We use a probit bivariate model to control for selective access to employment, and test the possibility of endogeneity of the decision to migrate. Separate estimations are run for upper-secondary and tertiary graduates. The results sustain the appropriateness of the estimation technique and show a significantly negative impact of the daily commuting time for the former group, as well as, negative impact of the decision to migrate and of the migration distance for the latter one.
    Keywords: Overeducation, Spatial flexibility, Local labour markets, Sample selection bias
    JEL: J21 J61 J62
    Date: 2011–07
  6. By: Teemu Lyytikäinen
    Abstract: This paper uses a Finnish policy intervention to study tax competition among local governments. Changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighbouring municipalities. I do not find evidence of interdependence in property tax rates among Finnish municipalities. The results are in contrast to the earlier empirical literature, using data from other countries, that has mainly found positive interdependence in tax rates. I compare the causal estimates based on the policy change to the commonly used Spatial Lag estimates and Spatial Instrumental Variables estimates, which are based on highly restrictive assumptions. The comparisons suggest that the standard spatial econometrics methods may have a tendency to overestimate the degree of interdependence in tax rates.
    Keywords: Property tax, tax competition, fiscal interaction, instrumental variables, spatial econometrics
    JEL: H71 H20 H77
    Date: 2011–08–31
  7. By: Michele Raitano; Francesco Vona
    Abstract: The empirical literature using large international students’ assessments tends to neglect the role of school composition variables in order not to incur in a misidentification of peer effects. However, this could lead to an error of higher logical type since the learning environment crucially depends on peer variables. In this paper, using PISA 2006, we show how peer heterogeneity is a key determinant of students’ attainments. Interestingly, the effect of peer variables differs depending on the country tracking policy: peer heterogeneity reduces efficiency in comprehensive systems whereas it has a non-linear impact in early-tracking ones. In turn, linear peer effects are larger in early-tracking systems. Results remain robust in both student- and school-level regressions and when we add school-level dummies and several controls correlated with the school choice to alleviate the selectivity bias.
    Keywords: peer heterogeneity, peer effects, schooling tracking, educational production function.
    JEL: I21 I28 J24
    Date: 2011–05
  8. By: Lawrence J. White
    Date: 2011
  9. By: Rainer Schulz; Martin Wersing
    Abstract: The quality of newly constructed single-family houses is usually homogeneous in and heterogeneous between neighborhoods. Such quality-clustering will be caused by the variation of natural amenities throughout a suburban area. Clustering will be enforced if the quality of neighboring buildings increases the value of newly constructed ones. To disentangle the natural amenity eect and the neighborhood eect, we use data from Berlin and exploit that the endogenous eect was weakened during the socialist period. Our results show that the exogenous variation caused by buildings constructed during this period still causes lower quality new buildings in the East of the city.
    Keywords: housing supply, housing externality, natural experiment
    JEL: R31 D62 C31
    Date: 2012–02
  10. By: Marletto, Gerardo; Mameli, Francesca
    Abstract: The assessment of policies for sustainable urban mobility features two basic characteristics: incommensurability and strong uncertainty. This is why multiple dimensions of evaluation and a structured room for collective deliberation and learning should be considered. A participative procedure is used to select a core set of performance indicators of policies for sustainable urban mobility. Citizen participation and stakeholder involvement are obtained through a national sample survey and a deliberative multi-criteria analysis, respectively. This procedure is applied to the Italian case. Citizens are more oriented towards reducing private transport costs, air pollution and traffic accidents; stakeholders are more in favour of improving car-free accessibility and reducing the consumption of land and public space generated by urban mobility. The resulting core sets of indicators are highly sensitive to the threshold chosen for the selection. Using a lower cut-off threshold, four performance indicators are shared between the two sets: ‘CO2 from transport’, ‘Quantity and quality of public transport’, ‘PMx, COVNM, NOx, CO from transport’, ‘Death and injuries from traffic accident’; using a higher cut-off threshold the two sets feature no intersection. Further testing at a local scale is needed in order to explicitly consider context-specific objectives, indicators and data; stronger interactions among experts, citizens and stakeholders are needed in order to avoid the generation of equivocal results.
    Keywords: Participation; Urban mobility; Sustainability indicators; National survey
    JEL: Q51 R41
    Date: 2012–02–02
  11. By: Gregg Huff (Pembroke College, University of Oxford, Oxford OX1 1DW, UK)
    Abstract: Between the 1870s and World War II, falls in world shipping costs and Western industrialisation gave rise to export-led Southeast Asian growth and specialization in a narrow range of primary commodity exports. A linked development was the emergence of a few dominant Southeast Asian urban centres, typically primate and always ports. Drawing on historical census data, this paper uses rank-size distributions and transition matrices to investigate the influence of commodity specialisation and exports on urban systems development in the region. It is argued that different commodities produced different spread effects, resulting in variation in degrees of urban concentration in the region. However, geography, path dependence and infrastructure also shaped urban systems development. The main cities that emerged during this period became the ‘gateways’ that connected frontier Southeast Asia to the global economy.
    Keywords: urbanisation; gateway cities; agglomeration effects; export-led growth; staple exports; urban systems; rank-size distributions; transition matrices
    JEL: N15 N95 R11
    Date: 2012–02–22
  12. By: Iftikhar Hussain
    Abstract: Ofsted inspections of schools have been a central feature of state education in England for nearly 20 years. Research by Iftikhar Hussain explores the validity of the school ratings that Ofsted produces, the impact of a fail rating on subsequent pupil performance and the extent to which teachers can 'game' the system.
    Keywords: education, UK,
    Date: 2012–02
  13. By: Domenico Depalo; Silvia Fedeli
    Abstract: On the basis of a unique dataset referring to all 8,100 Italian municipalities and providing details of their balance-sheets, local governments’ features, socio-demographic and economic indicators, we analyze the determinants of the local cultural expenditures. We exploit the panel nature of the data to explain observable and unobservable heterogeneity. Other than the traditional determinants, we find that per capita cultural expenditures increase with the population size, but decrease with the share of men over total population; immigrants increase local cultural spending only in the long run. The number of years in power of the municipal council also plays a role.
    Keywords: Local public expenditure, cultural expenditure, immigrants, local government choice, Mundlak correction.
    JEL: H72 Z10 C23
    Date: 2011–02
  14. By: Hang XIONG
    Abstract: China's actual fiscal decentralization is one-sided: while public expenditures are largely decentralized, fiscal revenues are recentralized after 1994. One critical consequence of the actual system is the creation of significant fiscal imbalances at sub-national level. This paper investigates empirically effects of fiscal imbalances on environmental performance of Chinese provinces. First, environmental efficiency scores of Chinese provinces are calculated with SFA for the period from 2005 to 2010. Then, these scores are regressed against two fiscal imbalance indicators in a second stage model. Finally, conditional EE scores are calculated. This paper finds that effects of fiscal imbalances on EE are nonlinear and conditional on economic development level. Fiscal imbalances are more detrimental to environment in less developed provinces. These results suggest that the one-sided fiscal decentralization in China may have regressive environmental effects and contribute to regional disparity in terms of sustainable development.
    Keywords: Chinese provinces, Decentralization; Environmental efficiency; SFA
    JEL: R51 H70 Q56
    Date: 2012
  15. By: Ernest Miguélez (Economics and Statistics Division, World Intellectual Property Organization and Faculty of Economics, University of Barcelona); Rorina Moreno (Faculty of Economics, University of Barcelona)
    Abstract: The aim of the present paper is to identify the determinants of the geographical mobility of skilled individuals, such as inventors, across European regions. Their mobility contributes to the geographical diffusion of knowledge and reshapes the geography of talent. We test whether geography, amenities, job opportunities and social proximity between inventors’ communities, and the so-called National System of Innovation, drive in- and out-flows of inventors between pairs of regions. We use a control function approach to address the endogenous nature of social proximity, and zero-inflated negative binomial models to accommodate our estimations to the count nature of the dependent variable and the high number of zeros it contains. Our results highlight the importance of physical proximity in driving the mobility patterns of inventors. However, job opportunities, social and institutional relations, and technological and cultural proximity also play key roles in mediating this phenomenon.
    Keywords: inventors’ mobility, gravity model, amenities, job opportunities, social and institutional proximities, zero-inflated negative binomial, European regions. JEL classification: C8, J61, O31, O33, R0
    Date: 2012–02
  16. By: Carmen Camacho (Centre d'Economie de la Sorbonne); Agustín Pérez-Barahona (INRA)
    Abstract: We build a model to study optimal land use, encompassing land use activities, pollution and climate change. This benchmark set-up allows us to identify the spatial drivers behind the interaction between land use and the environment. Pollution generates local and global damages since it flows across locations following a Gaussian Plume. In constrast to the previous literature on spatial dynamics, we prove that the social optimum problem is well-posed, i.e., the solution exists and is unique. We close the paper with a numerical analysis which illustrates the richness of our model, and its global dynamics. We study the different drivers of spatial heterogeneity. In particular, abatement technology stands out as a fundamental ingredient to achieve steady state solutions, which are compatible with the emergence of spatial patterns.
    Keywords: Land use, spatial dynamcis, pollution.
    JEL: C6 Q15 Q53 R1
    Date: 2012–02
  17. By: Mary-Françoise RENARD (Centre d'Etudes et de Recherches sur le Développement International); Hang XIONG
    Abstract: This paper studies whether Chinese provinces set strategically their environmental stringency when faced with interprovincial competition for mobile capital. Using Chinese provincial data and spatial panel econometric models, we find that Chinese provinces do engage in this kind of strategic interaction, particularly among those with similar industrial structure. Furthermore, we haven't found evidence of asymmetric responsiveness suggested by the race to the bottom theory. Finally, the one-sided fiscal decentralization is likely to strengthen the strategic behavior. These empirical results call for a skeptical attitude towards China's decentralization of environment policy implementation as well as its fiscal arrangements.
    Keywords: China, strategic interaction, pollution, spatial panel
    JEL: C2 Q5 H7 R5
    Date: 2012
  18. By: Fredriksson, Peter (Stockholm University); Öckert, Björn (IFAU - Institute for Evaluation of Labour Market and Education Policy); OOsterbeek, Hessel (University of Amsterdam)
    Abstract: This paper evaluates the long-term effects of class size in primary school. We use rich administrative data from Sweden and exploit variation in class size created by a maximum class size rule. Smaller classes in the last three years of primary school (age 10 to 13) are not only beneficial for cognitive test scores at age 13 but also for non-cognitive scores at that age, for cognitive test scores at ages 16 and 18, and for completed education and wages at age 27 to 42. The estimated effect on wages is much larger than any indirect (imputed) estimate of the wage effect, and is large enough to pass a cost-benefit test.
    Keywords: Class size; regression discontinuity; cognitive skills; non-cognitive skills; educational attainment; earnings
    JEL: C31 I21 I28 J24
    Date: 2012–02–13
  19. By: Chiara Criscuolo; Ralf Martin; Henry G. Overman; John Van Reenen
    Abstract: Business support policies designed to raise productivity and employment are common worldwide, but rigorous micro-econometric evaluation of their causal effects is rare. We exploit multiple changes in the area-specific eligibility criteria for a major program to support manufacturing jobs ("Regional Selective Assistance"). Area eligibility is governed by pan-European state aid rules which change every seven years and we use these rule changes to construct instrumental variables for program participation. We match two decades of UK panel data on the population of firms to all program participants. IV estimates find positive program treatment effect on employment, investment and net entry but not on TFP. OLS underestimates program effects because the policy targets underperforming plants and areas. The treatment effect is confined to smaller firms with no effect for larger firms (e.g. over 150 employees). We also find the policy raises area level manufacturing employment mainly through significantly reducing unemployment. The positive program effect is not due to substitution between plants in the same area or between eligible and ineligible areas nearby. We estimate that "cost per job" of the program was only $6,300 suggesting that in some respects investment subsidies can be cost effective.
    Keywords: industrial policy, regional policy, employment, investment, productivity
    JEL: H25 L52 L53 O47
    Date: 2012–01
  20. By: Dechief, Diane; Oreopoulos, Philip
    Abstract: In earlier work (Oreopoulos, 2009), thousands of resumes were sent in response to online job postings across Toronto to investigate why Canadian immigrants struggle in the labor market. The findings suggested significant discrimination by name ethnicity and city of experience. This follow-up study focuses more on better understanding exactly why this type of discrimination occurs -- that is, whether this discrimination can be attributed to underlying concerns about worker productivity or simply prejudice, and whether the behaviour is likely conscious or not. We examine callback rates from sending resumes to online job postings across multiple occupations in Toronto, Montreal, and Vancouver. Substantial differences in callback rates arise again from simply changing an applicant’s name. Combining all three cities, resumes with English-sounding names are 35 percent more likely to receive callbacks than resumes with Indian or Chinese names, remarkably consistent with earlier findings from Oreopoulos (2009) for Toronto in better economic circumstances. If name-based discrimination arises from language and social skill concerns, we should expect to observe less discrimination when 1) including on the resume other attributes related to these skills, such as language proficiency and active extracurricular activities; 2) looking at occupations that depend less on these skills, like computer programming and data entry and 3); listing a name more likely of an applicant born in Canada, like a Western European name compared to a Indian or Chinese name, In all three cases, we do not find these patterns. We then asked recruiters to explain why they believed name discrimination occurs in the labour market. Overwhelmingly, they responded that employers often treat a name as a signal that an applicant may lack critical language or social skills for the job, which contradicts our conclusions from our quantitative analysis. Taken together, the contrasting findings are consistent with a model of ‘subconscious’ statistical discrimination, where employers justify name and immigrant discrimination based on language skill concerns, but incorrectly overemphasize these concerns without taking into account offsetting characteristics listed on the resume. Pressure to avoid bad hires exacerbates these effects, as does the need to review resumes quickly. Masking names when deciding who to interview, while considering better ways discern foreign language ability may help improve immigrants' chances for labour market success.
    Keywords: Immigration, Audit Study, Point System
    JEL: J70 J61
    Date: 2012–02–19
  21. By: Di Pietro, Giorgio (University of Westminster)
    Abstract: Whilst in the US there is a growing debate about the effectiveness of remedial university courses, this issue is less questioned in the UK. Using a regression discontinuity approach and data from a large School of a post-1992 UK university, we estimate the effect of remediation on student outcomes. We find no evidence that attending a math remedial program improves student performance in the first year. This finding is consistent and complements that of a recent study by Lagerlöf and Seltzer (2009), which is based on data from a pre-1992 UK university. Taken together, these results may call for a review of the remediation policy offered at university level in the UK.
    Keywords: regression discontinuity design, remedial mathematics, student performance
    JEL: A22 I20
    Date: 2012–02
  22. By: Lamia Kamal-Chaoui; Javier Sanchez-Reaza
    Abstract: This working paper is one in a series of OECD Working Papers on Regional Development of the OECD Public Governance and Territorial Development Directorate, conducted under the responsibility of Joaquim Oliveira Martins, Head of the OECD Regional Competitiveness and Governance Division (
    JEL: O1 O3 Q2 Q3 Q4 Q5 R1 R2 R3 R4 R5
    Date: 2012–02
  23. By: Gächter, Simon (University of Nottingham); Nosenzo, Daniele (University of Nottingham); Sefton, Martin (University of Nottingham)
    Abstract: We compare social preference and social norm based explanations for peer effects in a three-person gift-exchange game experiment. In the experiment a principal pays a wage to each of two agents, who then make effort choices sequentially. In our baseline treatment we observe that the second agent's effort is influenced by the effort choice of the first agent, even though there are no material spillovers between agents. This peer effect is predicted by a model of distributional social preferences (Fehr-Schmidt, 1999). As we show from a norms-elicitation experiment, it is also consistent with social norms compliance. A conditional logit investigation of the explanatory power of payoff inequality and elicited norms finds that the second agent's effort can be best explained by the social preferences model. In further treatments with modified games we find that the presence/strength of peer effects changes as predicted by the social preferences model. As with the baseline treatment, a conditional logit analysis favors an explanation based on social preferences, rather than social norms following for these treatments. Our results suggest that, in our context, the social preferences model provides a parsimonious explanation for the observed peer effect.
    Keywords: peer effects, social influence, gift-exchange, experiment, social preferences, inequity aversion, measuring social norms
    JEL: A13 C92 D03
    Date: 2012–02
  24. By: Amine Ouazad; Lionel Page
    Abstract: What is the impact of a pupil's perceptions of how their teachers will treat them on their motivation, efforts and educational achievements? To explore this question, Amine Ouazad and Lionel Page have conducted an experiment in which school children could use pocket money to place small bets on their performance in an exam.
    Keywords: education, UK,
    Date: 2012–02
  25. By: Aronsson, Thomas (Department of Economics, Umeå University); Persson, Lars (Department of Economics, Umeå University)
    Abstract: This paper concerns optimal taxation and public goods in an economic federation with decentralized leadership, where one lower level government is first mover also in the horizontal dimension. Under plausible assumptions, horizontal leadership reinforces the incentives created by decentralized leadership.
    Keywords: Optimal taxation; redistribution; public goods; fiscal federalism; decentralized leadership; horizontal leadership
    JEL: D31 D60 D82 H21
    Date: 2012–02–23
  26. By: Amédée-Manesme, Charles-Olivier (THEMA, Université de Cergy-Pontoise); Baroni, Michel (ESSEC Business School); Barthélémy, Fabrice (THEMA, Université de Cergy-Pontoise); Dupuy, Etienne (BNP-PARIBAS REAL ESTATE INVESTMENT SERVICES)
    Abstract: This paper aims to show that the accuracy of real estate portfolio valuations can be improved through the simultaneous use of Monte Carlo simulations and options theory. Our method considers the options embedded in Continental European lease contracts drawn up with tenants who may move before the end of the contract. We combine Monte Carlo simulations for both market prices and rental values with an optional model that takes into account a rational tenant’s behavior. We analyze to what extent the options exercised by the tenant significantly affect the owner’s income. Our main findings are that simulated cash flows which take account of such options are more reliable that those usually computed by the traditional method of discounted cash flow. Moreover, this approach provides interesting metrics, such as the distribution of cash flows. The originality of this research lies in the possibility of taking the structure of the lease into account. In practice this model could be used by professionals to improve the relevance of their valuations: the output as a distribution of outcomes should be of interest to investors. However, some limitations are inherent to our model: these include the assumption of the rationality of tenant’s decisions, and the difficulty of calibrating the model, given the lack of data. After a brief literature review of simulation methods used for real estate valuation, the paper describes the suggested simulation model, its main assumptions, and the incorporation of tenant’s decisions regarding break options influencing the cash flows. Finally, using an empirical example, we analyze the sensitivity of the model to various parameters, test its robustness and note some limitations.
    Keywords: Monte Carlo Simulations; Real Estate Portfolio Valuation; Break options; Lease Structure; Options
    Date: 2012–02–17

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