Price formation on a housing market and spatial income segregation

The price formation in Non-Walrasian markets is notoriously an open problem. Here we focus on urban housing markets, where the mismatch between supply and demand has important consequences in terms of social welfare. We propose a simple Agent-Based Model (ABM) that explicitly reproduces the market mechanism and which is specifically suited to study issues related to spatial income segregation. We first find the analytical solution of the ABM in some specific cases, shedding light on the structure of the model and on the effect of the parameters. We then simulate the fully-fledged ABM and find that: (i) the market mechanism easily implies income segregation; (ii) an increase of the demand in one part of the city can potentially increase the prices all over the city (in qualitative agreement with the data); (iii) subsidies are more efficient than taxes in mitigating income segregation. These non-trivial results provide an example of the kind of insights that can be gained if one considers bounded rationality, heterogeneity and the potential lack of (Walrasian) equilibrium, as it would have been much less natural to address these issues under more standard assumptions.