FEDERAL RESERVE BANK of NEW YORK

We evaluate the effect of land use regulation on the value of land and on welfare. Our estimates are based on a decomposition of the effects of regulation into three components: an own-lot effect, which reflects the cost of regulatory constraints to the owner of a parcel; an external effect, which reflects the value of regulatory constraints on one's neighbors; a supply effect, which reflects the effect of regulated scarcity of developable land. Using this decomposition, we arrive at a novel strategy for estimating a plausibly causal effect of land use regulation on land value and welfare. This strategy exploits cross-border changes in development, prices, and regulation in regions near municipal borders. Our estimates suggest large negative effects of regulation on the value of land and welfare in these regions.

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