Urban Housing Retrofitting and Analysis of Financing Market Effect, A Model for Urban and Financial Policy Coordination under Hyperbolic Discounting

In the urban housing and construction industry in Iran, research shows that the level of retrofitting is not optimal as a key component of the quality of buildings and a factor in the prevention of severe risks in natural disasters. This fact is reflected in the statistics of accidents and damages. For the first time, this study tries to explain this within the framework of the concept of hyperbolic discounting in behavioral economics, as well as the asymmetry of information between the developer and the consumer of housing. For this purpose, a theoretical behavioral model is developed using Liebsen's beta-delta discount function, to compare the behavior of citizens in the housing market with hyperbolic discount, with the optimal behavior. The results of the model show the sub-optimal demand for strengthening the building to prevent urban accidents. In this study, to correct and optimize the demand for retrofitting in the housing and urban construction industry, two mechanisms for paying subsidies and financing retrofitting have been presented and analyzed. The theoretical model shows that the financing strategy for optimizing the level of citizens' demand with hyperbolic discount, in the housing and construction industry, is effective and corrective with a good approximation. From this point of view, the financing mechanism is efficient in providing the optimal level of urban resilience in accordance with the risk of accidents in cities. The urban policy maker in coordination with the financial policy maker should make it possible to improve and optimize the behavior and choices of citizens by creating an advanced financing system in this area. Finally, the optimal rate for financing aimed at this goal is calculated by simulation and it is shown that this rate is very close to conventional rates in a wide range of cases and there is no need for subsidies.
JEL Classification: R21, R31, D11, D03