October 18, 2021

Foundations and Microfoundations: Building Houses on Regulated Land

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The most common land use regulations in the United States govern lot size and structural intensity. I specify a residential builder’s profit maximization problem that distinguishes between yard space and covered land and incorporates common regulations as constraints. The model yields a closed-form solution for the cost of minimum lot sizes and coverage ratios, which I estimate using tax appraisers’ data from two large Texas counties. Minimum lot size regulations usually bind, even though the Houston and Dallas areas are known for their permissive regulation. The gains from deregulation are largest where housing prices are high, not where the largest share of parcels is constrained.

Generalizing, I show that a theoretical city regulated by binding minimum lot sizes grows less in response to a wage increase than a city with binding height and coverage limits. A city regulated only by impact fees is more responsive still.