Tweaking the DiPasquale-Wheaton model

DiPasquale and Wheaton (DW) developed an elegant model of long-run equilibrium in the aggregate real estate market. It has tremendous pedagogical power and an attractive compactness of presentation. Unfortunately, it has drawbacks. The DW model glosses over the admittedly small distinction between the "cap" rate and the reciprocal of the gross income multiplier. More importantly, it assumes that the "cap" rate is exogenous, It does not reveal long-run equilibrium at a glance; instead, equilibrium must be found by trial and error. Although the model has elements of the short-run in it (e,g,, construction supply), it does not explicitly reveal important features of the adjustment process (e.g., is it protracted, and is there overshooting?). Finally, the DW model ignores expectations and vacancies. Several new devices are added to the model to remove all of the stated drawbacks. In so doing, the model gains descriptive power but loses some of the simplicity that has made it so popular. (C) 2001 Elsevier Science (USA).