Housing Regulation and Neighborhood Sorting Across the United States
Published:
(New Draft)
Honorable mention for best student paper at the 2024 Urban Economics Association European meeting.
Winner of the Bank of Canada Student Award.
Abstract:
In this paper, I consider the effect of minimum lot size regulation on welfare and urban structure. I construct a general equilibrium model in which households of heterogeneous incomes choose cities and neighborhoods, value affluent neighbors, and are burdened differently by regulation. The model explains two salient facts about residential income sorting: household incomes decline with residential density within cities, and this gradient is steeper in more productive cities. I provide causal evidence in support. A counterfactual deregulation exercise shows significant and progressive welfare gains for households (exceeding $2000 per household per year) that offset the losses to landowners. The exercise also reveals two surprising results. First, any productivity gains that occur from the expansion of productive cities are largely nullified by the out-migration of affluent households who prefer regulated neighborhoods. Second, deregulation does not exacerbate the neighborhood choice externality arising from the demand for affluent neighbors. These results suggest that the most important consequence of deregulating housing markets is an increase in housing affordability. Other counterfactual exercises underscore the lack of incentives for cities to unilaterally deregulate and show a significant opportunity for improved spatial targeting.