Do Supply Restrictions Raise the Value of Urban Land? The (Neglected) Role of Production Externalities
49 Pages Posted: 26 Sep 2013
Date Written: September 24, 2013
Supersedes Working Paper 12-25.
Restriction on the supply of new urban land is commonly thought to raise the value of existing urban land. Our paper questions this view. We develop a tractable production-externality-based circular city model in which firms and workers choose locations and intensity of land use. Consistent with evidence, the model implies exponentially decaying density and price gradients. For plausible parameter values, an increase in the demand for urban land can lead to a smaller increase in urban rents in cities that cannot expand physically because they are less able to exploit the positive external effect of greater employment density.
Keywords: Land use, density gradients, agglomeration economies, commuting costs
JEL Classification: E10, R00
Suggested Citation: Suggested Citation