Amrita Kulka (University of Wisconsin, Madison)

“Sorting into Neighborhoods: The Role of Minimum Lot Sizes”

Abstract: This paper examines how land use regulations induce households to sort by income into differently regulated neighborhoods using the example of minimum lot sizes. By imposing a floor on housing consumption, high minimum lot sizes play a role in limiting access to neighborhoods that may have more amenities. First, I quantify the effect of minimum lot size regulations on neighborhood composition using a boundary discontinuity design. I find that at boundaries with the average level of regulation, average household income increases by 4.5% for a decrease in the density by one dwelling unit per acre. This is a considerable effect compared to the sorting induced by boundaries with sharp changes in public goods provision. Next, I develop a neighborhood choice model in which minimum lot sizes affect the trade-off between neighborhood amenities and consumption. I use the model to study the effects of relaxing minimum lot size restrictions on sorting and welfare. Average neighborhood income is 30% lower in a high-amenity neighborhood with relaxed minimum lot size. I find that households with at least the area’s median income benefit from this policy. The price of vacant land that is regulated in different ways depends on the degree to which the regulation imposes a constraint on demand given the available quantity of land.