The New Economics Of Equilibrium Sorting And Its Transformational Role For Policy Evaluation
Households "Sort" across neighborhoods according to their wealth and their preferences for public goods, social characteristics, and commuting opportunities. The aggregation of these individual choices in markets and in other institutions influences the supply of amenities and local public goods. These "Equilibrium sorting" models use the properties of market equilibrium, together with information on household behavior, to infer structural parameters that characterize preference heterogeneity. The results can be used to develop theoretically consistent predictions for the welfare implications of future policy changes.