Anthony Yezer and Yishen Liu
Abstract: Foreclosure externalities, in which recent foreclosures proximate to a housing unit depress its sales price, are well accepted in the literature. These papers use a geographic differencing strategy to eliminate the problem of selection into treatment. They also assume that the partial and total derivatives of the outcome (house value) with respect to the treatment (foreclosure) are constant and equal. This paper relaxes these assumptions producing very different results. These findings likely generalize to a larger body of research where differencing often in the form of regression discontinuity, propensity score matching, or synthetic controls is used to achieve identification while assuming total and partial derivatives of the outcome with respect to the treatment are constant and equal.
JEL: R23, R30, R31.
Keywords: Foreclosure; Specification error; Loan-to-value ratio; Externalities.