Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation

Abstract

Why does it cost so much to build a home? We formalize and evaluate the hypothesis that land-use regulation reduces the average size of home builders, which limits their ability to reap returns from scale and their incentives to invest in technology. Our model distinguishes between regulation of entry, which acts as a fixed cost and increases equilibrium firm size, and project-level regulation, which reduces project and firm size. If larger firms have stronger incentives to invest in technology, then such investment partially offsets the harm that regulation of entry does to consumers, but reduced investment exacerbates the negative impacts of project-level regulation. We document that the US has higher production costs than comparably wealthy countries, and that these costs are higher in more regulated American cities. Homes built per construction worker remained stagnant between 1900 and 1940, boomed after World War II, and then plummeted after 1970 just as land-use regulations soared. Residential construction firms are small, relative to other industries like manufacturing, and smaller firms are less productive. More regulated metropolitan areas have smaller and less productive firms. Under the assumption that one half of the link between size and productivity is causal, America’s residential construction firms would be 91% percent more productive if their size distribution matched that of manufacturing.

Keywords: construction productivity, housing affordability, urban economics

JEL Classification: L74, R12, R2