Housing Regulation and Neighborhood Sorting Across the United States
(Job Market Paper)
Published:
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 show that minimal lots are the most expensive in the low-density neighborhoods of productive cities relative to others, and this can explain the sorting on income into these cities and neighborhoods. Motivated by this evidence, 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. A counterfactual deregulation exercise shows significant and progressive welfare gains for renting households (9% of income) that offset the losses to landowners (17% of land values). The exercise also reveals two surprising results. First, any productivity gains that occur from the expansion of productive cities is largely nullified by the out-migration of affluent households who prefer regulated neighborhoods. Second, deregulation exacerbates the costs of the neighborhood choice externality arising from the demand for affluent neighbors, but only slightly. These results suggest that the most important consequence of deregulating housing markets is increasing housing affordability. Other counterfactual exercises underscore cities’ lack of incentives to unilaterally deregulate and show a significant opportunity for improved spatial targeting.