Auctioning the Upzone

Abstract

This paper proposes a new framework for inducing cities with severely supply-constrained housing markets to allow a lot more high-density housing. Local governments that rezone for larger buildings would (with the approval of a state agency) be permitted to auction, and thus profit from, the newly created buildable space. Winning bidders would acquire tradeable development allowances, which developers would have to acquire and redeem as a condition of project approval. We argue that this framework would expand the supply and density of urban housing through three channels. First, it would enable municipal governments to capture much more of the economic value created by upzoning and regulatory streamlining than they do today, which in turn would create new and better opportunities for local political entrepreneurs to assemble pro-development coalitions. Second, our framework would make local upzoning and regulatory streamlining deals more durable than they are today. This is so because local factions whose policy goals align with the state housing agency’s would be able to use auction contracts and state law to entrench their policies, and because the after-auction allowance market would act as a shock absorber, reducing allowance prices as necessary to offset regulatory and other shocks to the cost of development. Third, our framework would help to rectify informational asymmetries that presently hinder state oversight of local land-use plans.

(For a shorter white paper outlining the auction idea, see: https://ssrn.com/abstract=3296622.)

Keywords: housing, land use, auctions, exactions, development constraint, property, local government, fiscal zoning, zoning