Capitalization as a Two-Part Tariff: The Equilibrium Structure of Housing Prices

A previous version of this working paper was originally published as Capitalization as a Two-Part Tariff: The Role of Zoning in March 2019.

This paper investigates whether neighborhood amenities are capitalized into housing prices via a two-part tariff: an extensive margin price for housing of any size or quality and an intensive margin price that raises the price per unit of housing services. A stylized model shows that extensive margin pricing will emerge when there are frictions (such as density regulations) to the allocation of housing across space. Using a data set of housing transactions across markets of the United States, we show that two-part tariff pricing is ubiquitous and especially pronounced in markets with high regulation and older housing stock. Two-part pricing is relevant for hedonic estimation of local amenities: In particular, ignoring it will understate the poorer households’ willingness to pay for nonmarketed goods such as public schools.