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Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation

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  • Devin Bunten

Abstract

Highly productive U.S. cities are characterized by high housing prices, low housing stock growth, and restrictive land-use regulations (e.g., San Francisco). While new residents would benefit from housing stock growth in cities with highly productive firms, existing residents justify strict local land-use regulations on the grounds of congestion and other costs of further development. This paper assesses the welfare implications of these local regulations for income, congestion, and urban sprawl within a general-equilibrium model with endogenous regulation. In the model, households choose from locations that vary exogenously by productivity and endogenously according to local externalities of congestion and sharing. Existing residents address these externalities by voting for regulations that limit local housing density. In equilibrium, these regulations bind and house prices compensate for differences across locations. Relative to the planner's optimum, the decentralized model generates spatial misallocation whereby high-productivity locations are settled at too-low densities. The model admits a straightforward calibration based on observed population density, expenditure shares on consumption and local services, and local incomes. Welfare and output would be 1.4% and 2.1% higher, respectively, under the planner?s allocation. Abolishing zoning regulations entirely would increase GDP by 6%, but lower welfare by 5.9% because of greater congestion.

Suggested Citation

  • Devin Bunten, 2017. "Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation," Finance and Economics Discussion Series 2017-064, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2017-64
    DOI: 10.17016/FEDS.2017.064
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      by Jason Barr in Skynomics Blog on 2018-01-31 17:50:23

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    2. Taner Osman, 2020. "Restrictive Land Use Regulations and Economic Performance," International Regional Science Review, , vol. 43(4), pages 291-315, July.
    3. Greg Howard & Jack Liebersohn, . "Regional Divergence and House Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    4. Herkenhoff, Kyle F. & Ohanian, Lee E. & Prescott, Edward C., 2018. "Tarnishing the golden and empire states: Land-use restrictions and the U.S. economic slowdown," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 89-109.
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    More about this item

    Keywords

    General Equilibrium; House Prices; Housing Supply; Regulation; Urban; Rural; & Regional Economics;
    All these keywords.

    JEL classification:

    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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