Do Supply Restrictions Raise the Value of Urban Land? The (Neglected) Role of Production Externalities

Supersedes Working Paper 12-25 - A Tractable Circular City Model with an Application to the Effects of Development Constraints on Land Rents

This paper questions this view. The authors develop a tractable production-externality-based circular city model in which firms and workers choose locations and intensity of land use. Consistent with evidence, the model implies exponentially decaying density and price gradients. For plausible parameter values, an increase in the demand for urban land can lead to a smaller increase in urban rents in cities that cannot expand physically because they are less able to exploit the positive external effect of greater employment density.