lhe zyx Efficiency zyxw and Mbution of age zyx Revenue zyx 9 Don Subsidies: lhe Effects of zyxw Behavioml Responses zyxw Dan Duming Abstract zyxwvu Mortgage revenue bond (MRB) programs are frequently justified on the basis that they enable low- or moderate-income families to purchase houses that they otherwise could not afford.This article argues that evaluations of MRB programs must include estimates of the responses of buyers and sellers to the subsidies. The empirical evidence indicates that the behavioral responses reduce the efficiency of MRB programs (the amount of the subsidies provided to targeted households) and cause the subsidies to be distributed more inequitably than previous research has shown. The capitalization of 10% to zy 14% of the value of MRB subsidies diverts some of the program bent@ to sellers. Horizontal inequities are created because one group of moderate- income households use the subsidies to purchase more housing services than unsubsidized households with the same incomes. INTRODUCTION The policy debate about mortgage revenue bond (MRB) programs has addressed both the efficiency and distribution of the loan subsidies. Strong theoretical arguments and some empirical evidence have supported the conclusion that MRB programs are inefficient, yielding less in benefits than they cost.' Also, a small amount of empirical research has shown that a majority of the subsidies has been distributed to households with above- median incomes.' These studies of MRB subsidies, however, are incomplete and may evalu- ate MRB programs inaccurately because they do not adequately factor in the effects of the subsidies on the decisions of house buyers and sellers. The spending decisions of house buyers, according to microeconomic theory, will be affected through income and substitution effects if MRB subsidies reduce the price of housing. The actual changes in consumer behavior in response to MRB subsidies depend on the nature of the subsidy. In the Experimental Housing Assistance Program (EHAP),for example, renters responded differ- Journal of Policy Analysis and Management, Vol. 7, No. 1,74-93 (1987) zyx 0 1987 b the Association for Public Policy Analysis and Management Publishedl by John Wiley & Sons, Inc. CCC 0276-8739l87104074-20$04.00