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� 2010 Elsevier Inc. All rights reserved.
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the first prospective tenant. When rents are fixed at subsi- cient incentive for sellers to produce the good. The result-
ing under-supply of the subsidized good leads to the
famous ‘‘deadweight loss’’ illustrated in economics text-
books. Less well recognized is the fact that competition
for the price subsidy generally leads to the dissipation of
value. Barzel (1974) shows how equilibrium can be
achieved through socially wasteful rationing by waiting.
In the context of public housing, prospective tenants may
1051-1377/$ - see front matter � 2010 Elsevier Inc. All rights reserved.
q We thank the Editor and an anonymous referee for useful comments
and suggestions that significantly improved the quality of the paper.
⇑ Corresponding author. Address: Department of Marketing & Interna-
tional Business, Lingnan University, Tuen Mun, Hong Kong, China. Fax:
+852 2616 5548.
E-mail address: hklui@ln.edu.hk (H.-K. Lui).
Journal of Housing Economics 20 (2011) 15–29
Contents lists available at ScienceDirect
Journal of Housi
journal homepage: www.el
doi:10.1016/j.jhe.2010.11.001
sider, for example, two otherwise identical housing flats
available for allocation between two prospective tenants.
Flat A is located in a more desirable neighborhood than Flat
B, so both prospective tenants are willing to pay a pre-
mium rent for Flat A. Suppose the first person also happens
to work in the same neighborhood as the location of Flat A,
and he is prepared to pay a higher premium for Flat A than
is the second prospective tenant. In an open market, Flat A
will be allocated to the person who values it more, namely
mechanism. The purpose of this paper is to study some
of the inefficiencies induced by the use of non-price meth-
ods of allocation in the provision of public housing in Hong
Kong.
The misallocation of resources under non-price meth-
ods of allocation draws from a large and well-established
literature in economics (e.g., Cheung, 1974; Weitzman,
1977; Suen, 1989; Glaeser and Luttmer, 2003). When a
good is allocated at below-market price, there is insuffi-
Keywords:
Public housing
Mobility
Allocative inefficiencies
1. Introduction
Public housing represents a sizab
cost and it has to be strictly ration
users. When rationing occurs, resou
cated to their most valuable uses b
effectively convey the intensity of t
bsidy to housing
ong competing
may not be allo-
e people cannot
references. Con-
dized levels and flats are allocated by non-market means,
however, both prospective tenants will reveal (truthfully)
that they prefer Flat A to Flat B. There is no means to
administratively determine which of the two is the high-
er-value user for the more desirable flat. In practice, subsi-
dized housing is often allocated on the basis of stated
preferences supplemented by some lottery or queuing
R21
I38
H53
than private housing occupants, but conditional on moving, they are more likely to relocate
farther away from their original place of residence. They are also less likely to work in the
same place as they live.
The effects of public housing on inte
Hon-Kwong Lui ⇑, Wing Suen
Lingnan University, China
The University of Hong Kong, China
a r t i c l e i n f o
Article history:
Received 29 June 2009
Available online 27 November 2010
JEL Code:
a b s t r a c t
The rationing of pub
units and their occu
through a price me
perspective of the
misallocation affect
al mobility in Hong Kongq
using reduces the efficiency of the match between public housing
s, as competing users cannot effectively convey their preferences
sm. This study investigates the costs of public housing from the
location of housing units to households and examines how this
ir lives. We show that public housing occupants are less mobile
ng Economics
sevier .com/locate / jhec
distort their labor supply decisions lest their income ex-
ceeds the eligibility threshold, while incumbent tenants
may choose to inefficiently stay in their flats upon chang-
16 H.-K. Lui, W. Suen / Journal of Housing Economics 20 (2011) 15–29
ing circumstances lest they lose the valuable subsidy. Yet
a third source of inefficiency is that, when individuals can-
not express their intensity of preferences through their
willingness to pay, non-price methods of allocation gener-
ally fail to allocate scarce resources to the highest-value
users. If a flat worth a rental of HK$10,000 a month is being
rented at HK$2000, any prospective tenant whose value for
the flat exceeds HK$2000 will be interested in bidding for
it. Depending on the allocation method being adopted,
the flat may well end up in the hands of someone whose
value for it is well below HK$10,000. Deacon and Sonstelie
(1989, 1991) and Suen (1989) analyze the welfare costs
arising from such misallocation of resources when ration-
ing is by waiting. In a more recent study, Glaeser and Lutt-
mer (2003) study the misallocation of housing in New York
City under rent control. They find that the matching of the
characteristics of tenants to the characteristics of their
housing units is distorted for flats under rent control. Since
rent control also represents a housing subsidy to existing
tenants, Glaeser and Luttmer’s (2003) insight is equally
applicable to the analysis of government-subsidized
housing.
In Hong Kong, public housing affects a large fraction of
the population. In 2009, 29% of the households were ten-
ants in government-provided housing, and another 18%
owned subsidized housing through the Home Ownership
Scheme and related programs (Hong Kong Housing
Authority, 2010a). Critics of public housing policy often fo-
cus on the fiscal burden imposed by such massive subsi-
dies. Less well researched are costs from the allocative
inefficiencies induced by rationing subsidized housing.
Although these costs may be less tangible than the direct
fiscal costs, they can have a more immediate impact on
people’s everyday lives. In this paper, we focus on distor-
tions on location choices induced by public housing.
Public housing benefits tend to tie down tenants to
their current location; residents in public housing are ex-
pected to be less likely to move to more convenient loca-
tions or more suitable housing units even after their life
circumstances have changed. This hypothesis is related to
the literature on the ‘‘job lock’’ effect on job mobility
(e.g., Madrian, 1994; Gilleskie and Lutz, 2002; Adams,
2004; Bansak and Raphael, 2008). That literature examines
the effect of employer-provided health insurance on job
mobility, the hypothesis being that workers are reluctant
to switch their jobs lest they lose their insurance coverage.
In a similar vein, we examine the hypothesis that public
housing benefits deter internal mobility because occupants
do not want to lose their substantial housing subsidy.1
In the urban studies literature, there is a substantial
body of work documenting the empirical patterns of inter-
nal migration (e.g., Greenwood, 1985; Elliott, 1997; Pain-
ter, 1997). Boyle and Shen (1997) study the effect of
public (council) housing on internal migration in Britain
1 If they want to move to another subsidized unit, the administrative
hurdles and waiting time are substantial because of the persistent shortage
induced by below-market prices.
and find that public housing occupants are less likely to
migrate long distances outside the area of the local council.
In a recent paper, Kim et al. (2005) demonstrate that trans-
port related attributes have significant impacts on residen-
tial location choice and individuals prefer locations with a
combination of shorter commuting time, lower transport
costs, lower density and higher quality of school. In the
United States, public housing complexes are often clus-
tered in central-city locations with high concentration of
poverty (Quigley, 2000). Many believe that living in such
neighborhoods limits one’s economic opportunity (Wilson,
1996). To reduce economic segregation induced by project-
based public housing provision, the US Department of
Housing and Urban Development has experimented with
tenant-based rental subsidies to encourage them to move
from high-poverty to low-poverty areas (e.g., the Moving
to Opportunity Program). Johnson et al. (2002) report that
families who take advantage of these programs to move to
low-poverty areas experience reductions in welfare depen-
dence and improvements in health status. There is also evi-
dence that such moves may improve children’s schooling
outcomes and reduce their problem behaviors (see also
Feins and Shroder, 2005; Ludwig et al., 2005; Rosenbaum
and Harris, 2001).
In addition to the lack of internal mobility, another
manifestation of the distortions in location choices induced
by public housing is the mismatch between place of resi-
dence and place of work. A competitive rental market
solves the efficient assignment problem as housing units
go to their highest-value users (Koopmans and Beckmann,
1957). The price system fails to perform this function when
rents for public housing units are fixed and the allocation
of units in excess demand is determined by non-price
means. Moreover, even when there is no initial mismatch
between place of residence and place of work, people’s cir-
cumstances change. When circumstances (e.g., change to a
new job) prescribe moving to another area, the lack of
mobility on the part of public-housing tenants may hinder
the optimal reallocation of resources. The determination of
residential and work location is a well researched topic in
urban economics (e.g., Vickerman, 1984; Siegel, 1975;
Simpson, 1987; Kan, 2002; Kan, 2003). Also of some rele-
vance to our present work is the literature on the ‘‘spatial
mismatch hypothesis’’ of Kain (1968). Kain’s work was
originally related to how residential segregation adversely
affected the employment opportunities of blacks in the
United States (see also Holtzer (1991)). Although residen-
tial segregation by race is not a major problem for Hong
Kong, the fact that public housing estates are often located
far from centers of economic activities may have implica-
tions for the mismatch between place of residence and
place of work.
Moreover, housing tenure also plays an important role in
determining residential mobility and employment (e.g.,
Ioannides and Kan, 1996; Kan, 2000; Dohmen, 2005). Battu
et al. (2008) study the effects of housing tenure on individ-
uals’ job and unemployment durations in the United King-
dom. They argue that home ownership and public rental
housing impose more constraint on employed and unem-
ployed, respectively. Munch et al. (2008) argue that home
ownership has a negative effect on the unemployment risk
likely than their private housing counterparts to have to
applicants, applicants can only choose one district from
among the three non-urban areas for their future housing
allocation. As of July 2010, there were more than 130,000
applicants on the waiting list (Hong Kong Housing Author-
ity, 2010b). The Housing Authority sets a target of main-
taining the average waiting time at 3 years.
In the process of public housing allocation, applications
are processed strictly in accordance with the application
sequence numbers and the applicants’ choices of district.
H.-K. Lui, W. Suen / Journal of Housing Economics 20 (2011) 15–29 17
move outside their original district or region of residence.
They are also less likely to work in the same place as they
live. Our conclusions are based on probit regressions of
mobility and travel behaviors on public occupancy status.
We try to control for other determinants of such behaviors
by including an extensive set of control variables in our
regressions. Many of our regression models are estimated
using hundreds of variables. However, we cannot exclude
the possibility that there are some remaining unobserved
differences across occupancy groups that affect mobility.
The empirical results presented in this paper should be
interpreted with this caveat in mind.
2. A brief review of thepublic housing allocation system
In Hong Kong there are approximately two million peo-
ple (about 30% of Hong Kong’s population) living in
700,000 public rental flats provided by the Housing
Authority (Hong Kong Housing Authority, 2010b). Public
housing applicants or their family members must not di-
rectly or indirectly own or co-own any domestic property.
Moreover, applicants are subject to income and total net
asset value limits as laid down by the Housing Authority.
The Housing Authority maintains a waiting list of public
rental housing applicants. From this list, eligible applicants
are offered accommodation in public rental housing es-
tates. When an applicant’s turn comes, the applicant will
be given a maximum of three offers (one option in each of-
fer) of public rental housing in the district of his/her choice.
The application will be cancelled if the applicant fails to
provide acceptable reason for refusing all the three hous-
ing offers (Hong Kong Housing Authority, 2010b). Public
rental housing estates are grouped into four broad districts,
namely Urban, Extended Urban, the New Territories, and
the Islands. Since there are insufficient public rental hous-
ing units in the Urban district that can be allocated to all
and a positive impact on wages. Huang and Deng (2006)
show that housing tenure has consistent but different ef-
fects on mobility over time in China. Helderman et al.
(2004) argue that there is a decrease in the effect of
homeownership on residential mobility given a rapid rise
in homeownership in the Netherlands. Munch et al. (2006)
suggest that homeownership hampers the propensity to
move for job reasons but improves the chances of finding lo-
cal jobs. As the availability of subsidized sale flats in Hong
Kong is more restrictive than that of private sector, public
home owners will face a higher distortion in location choice
than private counterparts. This may also have implications
for the mismatch between place of residence and place of
work among home owners.
In this paper, we use the census sample of Hong Kong to
examine the allocative inefficiencies induced by rationing
subsidized housing and how this misallocation affects
these tenants’ behavior concerning internal mobility and
travel-to-work. The empirical results suggest that public
housing occupants are more immobile and are less likely
to work in the same district or region as their place of res-
idence than their private housing counterparts. Moreover,
conditional on moving, public housing occupants are more
However, those who fulfill the eligibility criteria of the Ex-
press Flat Allocation Scheme may have an earlier chance to
be allocated public rental housing units. There are also sep-
arate criteria and allocation schemes for people affected by
squatter clearance and public housing redevelopment.
According to existing public housing policies, public-
housing tenants may apply for flat transfer under various
situations such as increased family size, special medical
or social grounds, or major improvement or redevelop-
ment programs implemented by the Housing Authority
(Hong Kong Housing Authority, 2010c).2 Whenever possi-
ble, eligible tenants will be transferred to suitable flats with-
in the same estate. Tenants may also apply for special
transfer to another estate. Due to persistent shortage of pub-
lic rental housing units, even if a tenant is eligible for flat
transfer, the waiting time can be quite long and there is no
guarantee that the new flat will match the tenant’s
preferences.
Besides applying for a public rental housing unit, eligi-
ble households can also apply to buy subsidized flats
through the Home Ownership Scheme (HOS).3 In setting
the price of HOS flats, the Housing Authority follows three
guiding principles: (i) the mortgage-to-income ratio should
not be more than 40%; (ii) 50% of the flats should be afford-
able to the target group; and (iii) flats should be offered at a
30% discount of market value.
Starting from the 3rd year of occupancy, HOS flat own-
ers may sell their flats in the open market after paying a
premium to the Housing Authority. The premium is basi-
cally equal to the prevailing market value multiplied by
the discount enjoyed by the owner at the time of purchase.
For example, if the prevailing market value of a HOS flat is
HK$2000,000 and the flat was offered at a discount of 30%
at the time of purchase, then the premium is equal to
HK$600,000. Owners of HOS flats can also sell their flats
to existing public rental housing tenants. In this case, the
original HOS owner will not be required to pay the pre-
mium to the Housing Authority before selling the flat,
but the purchaser will inherit the liability to pay the pre-
mium should he or she seek to sell the flat in the open mar-
ket later on. With these restrictions in place, the secondary
market for HOS flats is quite inactive.
2 In the past, public-housing tenants could participate in the Tenant
Mutual Exchange Scheme, which would arrange a maximum of four
matches in order to enable them to exchange their flats. However, the
scheme ceased operation in early 2006. It should be noted that unautho-
rized exchanges among tenants are regarded as breach of tenancy
agreements, resulting in termination of their tenancies.
3 Due to the collapse of the property market, the government suspended
the production and sale of HOS flats indefinitely from 2003 onwards.
18 H.-K. Lui, W. Suen / Journal of Housing Economics 20 (2011) 15–29
3. Empirical framework
The data set we use in this study is a random sub-sam-
ple of the Hong Kong Population Census. Relying on infor-
mation from the population census file, we compare the
pattern of internal mobility between public housing and
private housing occupants. A study of public housing in
Hong Kong (Wong and Liu, 1988) adopts a similar ap-
proach, but the focus of that study is on the distortion in
the level of housing consumption. Wong (1998) elaborates
this and other distortions induced by public housing, and
makes a case for privatization. By introducing another
dimension to the misallocation problem (namely, mobility
and location choice), our study adds to the debate concern-
ing various policy alternatives such as privatization or pri-
vate-market rent subsidy. Although housing tenure plays
an important role in mobility, the cross-sectional data set
used in this study does not contains adequate information
for more in-depth analysis. Hence, this paper should be
read with this limitation in mind.
Because of a persistent shortage of subsidized housing,
it is much more difficult for a public housing tenant to ob-
tain relocation to another public housing unit than for a
private housing occupant to move to another flat. More-
over, it is often an unrealistic option for public-housing
tenants to move to a private flat because doing so entails
losing a substantial government subsidy. This is similar
to the idea of the ‘‘job lock’’ effect in labor economics
(Madrian, 1994; Gruber and Madrian, 1994). In the ‘‘job
lock’’ effect, one may argue that the value of health insur-
ance provided by the employer is not a pure subsidy be-
cause of possible compensating wage differences. In the
case of government housing, the low rental is indeed a sub-
sidy. We therefore expect the ‘‘housing lock’’ effect on
internal migration to be even stronger than the ‘‘job lock’’
effect on job mobility. We hypothesize that, other things
equal, public housing occupants are more immobile than
private housing occupants (Hypothesis I).
We argue that public housing occupants are less mobile
than private housing occupants because the range of op-
tions available to them is more limited. By the same logic,
if we compare people who actually made a move, we ex-
pect to find that a tenant in public housing is less likely
to move to a unit that matches his preferences. Therefore,
c
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