Quantifying the Costs of Restricting Local Housing Development - Housing Supply Elasticities and Aggregate Labor Misallocation in Sweden

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: Housing prices have risen dramatically in Stockholm over the past two decades, while the housing stock has increased by a comparably minor amount. Seen through a spatial equilibrium framework, this indicates that Stockholm is contributing to increased labor misallocation, lowering aggregate Swedish output. We proceed to estimate local housing supply elasticities for 19 Swedish counties, as well as how land restrictions determine the supply elasticity in Stockholm, using an instrumental variables method. Employing a spatial equilibrium model with idiosyncratic location preferences, we then quantify the aggregate economic loss of labor misallocation caused by Stockholm land restrictions hindering workers from accesing Stockholm's labor market between 1996 and 2018. Had Stockholm adopted the same level of land restrictions as the national mean, annual real per capita growth in Sweden would have been at least 8.5% higher during the period in question.

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