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

44 Pages Posted: 5 Jun 2017

See all articles by Devin Bunten

Devin Bunten

Board of Governors of the Federal Reserve; University of California, Los Angeles (UCLA) - Department of Economics

Date Written: 2017-06

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.

Keywords: General Equilibrium, House Prices, Housing Supply, Regulation, Urban, Rural, & Regional Economics

JEL Classification: R52, H73, E61

Suggested Citation

Bunten, Devin, Is the Rent Too High? Aggregate Implications of Local Land-Use Regulation (2017-06). FEDS Working Paper No. 2017-064. Available at SSRN: https://ssrn.com/abstract=2980048 or http://dx.doi.org/10.17016/FEDS.2017.064

Devin Bunten (Contact Author)

Board of Governors of the Federal Reserve

20th and C Streets, NW
Washington, DC 20551
United States

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

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