Optimal housing supply in a bid-rent equilibrium framework

In this study, we examine how the spatial distribution of housing supply impacts people’s residential choices and developers’ profitability. By optimally providing housing supply in a region, developers attempt to maximize their profits; on the other hand, if residents were given a chance to decide on housing supply, what patterns of housing supply they would prefer in order to maximize their consumer surpluses. This paper studies the interplay between these two perspectives. A nested multinomial-logit choice structure that encapsulates the bid-rent process is used to capture residents’ location and travel choices simultaneously, and the resultant rents at different locations. To investigate the optimal housing supply for these two stakeholders, we conduct sensitivity analyzes to explore the impact of different housing supply patterns on total rental profit and total consumer surplus. Specifically, analytical results are derived for a simple linear network with two residential locations and one destination under homogeneous and heterogeneous value(s) of time. The results of the sensitivity analyzes indicate that segregation of housing supplies at different locations for different income classes is, surprisingly, a “preferred” outcome by residents under consumer surplus maximization, whereas creating housing supply shortages at convenient locations is a natural outcome under housing profit maximization. These results provide insights on revealing the differences and tradeoffs in performance between these two different perspectives, and on where land use regulations may be needed to balance these two objectives.