Nonlinear Budget Constraints and Consumer Demand: An Application to Public Programs for Residential Housing’

In contrast to many commodities traded in the economy, housing services include a diverse bundle of attributes priced in a complex way. Because of the high costs of transforming housing bundles, arbitrage is generally impossible; thus it is to be expected that the prices of individual attributes vary jointly in a nonlinear way, even in market equilibrium. Indeed, in the housing literature there has been a great deal of attention paid empirically to the joint pricing problem, and the literature on hedonic housing prices is voluminous.* Despite at least three discussions of the analogy between shopping for housing and shopping in a supermarket (cf. [4,8, 17]), the correct interpretation of these hedonic functions was widely misunderstood until the work of Sherwin Rosen [16] appeared. Rosen’s analysis indicated rigorously the relationship between the offer functions of suppliers, the bid functions of demanders and the hedonic structure of prices. Empirically, Rosen suggested a procedure for estimating the compensated demands of consumers, a procedure which has been implemented in the housing context in one recent paper [19]. More recently, it has been shown [2] that the estimation