This is the second in a series of Research Notes written by our summer intern, Ethan Roth. Ethan had the opportunity to attend a weekend economics conference earlier this summer and incorporated some of what he’s finding in his housing research into what he learned at the conference.
I recently had the opportunity to attend a George Mason University economics conference on public choice theory, the study of economic incentives that animate the behavior of individuals in government and in the political process. This post will explore how key insights from public choice theory relate to land-use zoning regulations in Nebraska, one of many local factors that influence housing prices.
Housing costs are high when supply cannot keep up with demand. Zoning is a primary supply constraint. Single-family zoning, which covers a large majority of residential land in Nebraska cities, prohibits the construction of duplexes, triplexes, apartment buildings, and other higher-density housing on most urban land. Minimum lot size requirements, binding in most towns across the state, require new homes to be built on larger, more expensive parcels of land. Smaller, more affordable lots that may appeal to the working and middle class are prohibited in most large-lot single-family zones. Height limits, setback requirements, parking minimums, and lot coverage maximums add additional constraints that reduce the number of homes that can be developed on a given piece of land, limiting housing supply. Since land-use zoning regulations constrain the supply-side response to increased housing demand, existing-home prices rise when supply is constrained and demand increases.
This may seem counterintuitive. Why do these zoning regulations still exist if they’re a major driver in high housing prices?
Individual homeowners and members of city government have a strong incentive to protect and increase their homes’ value through local politics. The logic of innate human self-interest, on which all economic thought is based, holds that humans act for their own preservation and betterment. Public choice theory holds that individuals in government, even at the local level, naturally respond to these incentives. Politicians and voters are not transformed into selfless public servants the moment they enter the political arena; rather, they retain the self-interested qualities that make market competition effective at driving innovation, improving product quality, and lowering prices for consumers. Naturally, Nebraskans respond to the incentives present in local zoning processes. Those who have the highest incentive and best position to organize and enact zoning ordinances are those who have the most to lose, homeowners already present in communities.
Public choice theory holds that small, organized interest groups consistently dominate the political process over large, diffuse groups, even when the larger, dispersed group stands to lose from the enactment of a particular policy. Incumbent homeowners have enormous, concentrated stakes in local land use decisions. Their home is often their single largest financial asset, and its value is tied to what is built nearby. Renters, would-be future residents, migrants, and lower-income households seeking affordable housing collectively have just as much at stake, yet they do not face the same incentives to protect the value of their existing wealth and assets. They are diffuse, unorganized, or outside the jurisdiction where the decision making is happening. What results are zoning regulations that protect existing property values at the expense of these unorganized, less incentivized individuals. The existing homeowners in local government, however, are the ones who understand the needs of their town. As with all decisions, planning boards face tradeoffs in creating zoning ordinances. While more restrictive land use ordinances may drive up the price of housing or restrict housing supply growth, planners must account for many effects like school district needs, neighborhood crowding, and traffic infrastructure.
The “Bootleggers and Baptists” public choice framework gives us insight into common arguments used to justify some zoning restrictions. Historic preservationists and neighborhood character advocates (the “Baptists”) provide a legitimate sentimental or moral case for certain zoning ordinances, however, incumbent property owners and established businesses (the “Bootleggers” in this case) may have concentrated financial incentives to ensure that the neighborhood character ordinances that are passed benefit their property values.
Public choice theory serves as an argument for humility about what government institutions can accomplish. It recognizes that humans retain their self-interest, even when they step into the public square. This narrow application of public choice theory to zoning regulations illuminates the natural incentives that may perpetuate restrictive land use ordinances. A careful, considerate review of land-use ordinances is just one important step to lower the housing prices and attract new residents to the Good Life.
