A survey technique called a fair housing audit provides a direct measure of racial discrimination in housing and an opportunity to test hypotheses about its causes. Audits conducted in Boston in 1981 uncovered extensive discrimination; black housing seekers were told about 30 percent fewer available housing units than were whites. This paper finds that the primary cause of this discrimination is economic: Housing agents cater to the racial prejudice of current or potential white customers.

The Tiebout literature is incomplete, this paper argues, because it has not fully accounted for the capitalization of local fiscal variables into house values. The paper explains why capitalization arises, why it persists in long-run equilibrium, how it affects both residential location and the outcome of local voting, and why it interferes with the efficiency of a system of local governments. The analysis, which is based on the main Tiebout assumptions plus a property tax, combines a model of household bids in a housing market with a median-voter model of local public service determination.

The Tiebout literature is incomplete, this paper argues, because it has not fully accounted for the capitalization of local fiscal variables into house values. The paper explains why capitalization arises, why it persists in long-run equilibrium, how it affects both residential location and the outcome of local voting, and why it interferes with the efficiency of a system of local governments. The analysis, which is based on the main Tiebout assumptions plus a property tax, combines a model of household bids in a housing market with a median-voter model of local public service determination.

The past decade has witnessed a strong interest among students of local public finance in models of voting with one's feet and in models of actual voting. Several authors, including Noel Edelson, Susan Rose-Ackerman, and Michael Lea, have recognized that these two types of voting must be considered simultaneously. The capitalization of local fiscal variables into house values, which is a by-product of voting with one's feet, influences the decisions of the median voter; and the pattern of local services that arises through actual voting influences the allocation of households to communities. A full-fleged merger of the two types of voting requires an analysis of capitalization in a model that considers both the housing market and the local voting process in a metropolitan area with diverse local governments financed by property taxes. Previous articles have focused on pieces of this puzzle. This paper reviews my attempt to bring these pieces together. My analysis reveals that, regardless of supply responses, capitalization is a feature of long-run equilibrium. Furthermore, in the presence of capitalization, an efficient pattern of local services cannot be obtained through voting with one's feet, but must be obtained instead through actual voting. If preferences in a community are not too diverse, the median voter will pick the efficient level of services with or without capitalization. However, the median voter's choice may not be efficient in an extremely heterogeneous community. In addition, capitalization breaks the link between tax payments and the choice of a community, and thereby insures that the property tax is not a benefit tax; in other words, it insures that housing is underconsumed relative to other goods. These results provide a framework for evaluating state and federal policies toward local governments. Without much heterogeneity within communities, one could achieve efficiency by eliminating the property tax or offsetting it with large subsidies to housing. These approaches are not realistic, however, and a second best solution is to cut back local services. The form of such a cutback is important. I show that tax limitations do not lead to efficiency, but that a second best solution could be obtained by redesigning intergovernmental grants.

Potential home buyers may initiate contact with a real estate agent by asking to see a particular advertised house. This paper asks whether an agent's response to such a request depends on the race of the buyer or on whether the house is located in an integrated neighborhood. Like previous research about the causes of housing discrimination, this paper uses data from fair housing audits, a matched-pair technique for comparing the treatment of equally qualified black and white home buyers. However, we shift the focus from differences in the treatment of paired buyers to agent decisions concerning an individual house. Using a sample of all houses seen during the 1989 national Housing Discrimination Study, we estimate a random-effect, multinomial logit model to explain a real estate agent's joint decisions concerning whether to show each house to a black auditor and to a white auditor. We find evidence that agents interpret an initial housing request as an indication of a customer's preferences, but also are more likely to withhold a house from all customers when it is in an integrated suburban neighborhood (redlining). Moreover, agents' marketing efforts increase with asking price for white, but not for black, customers; blacks are more likely than whites to see houses in suburban, integrated areas (steering); and the houses agents show are more likely to deviate from the initial request when the customer is black than when the customer is white. These three findings are consistent with the possibility that agents act upon the belief that some types of transactions are relatively unlikely for black customers (statistical discrimination).