Checkerboards and Coase: The Effect of Property Institutions on Efficiency in Housing Markets

Abstract

Abstract In the late 1800s, Palm Springs, California, was evenly divided into 1‐mile‐square blocks—like a checkerboard—and property rights were assigned in alternating blocks to the Agua Caliente tribe and a non‐Indian landowner by the U.S. federal government. The quasi‐experimental nature of land assignment holds land quality constant across the two types of landowners. Sales, mortgaging, and leasing restrictions on the Agua Caliente Reservation land created large transaction costs to development on those lands; consequently, there was very little housing investment. The non‐Indian blocks, which were extensively developed, provide a benchmark for efficient outcomes for the Agua Caliente lands. Once the restrictions on Agua Caliente lands were relaxed in 1959, the number of homes and real estate values converged to those of non‐Indian‐owned lands as predicted by the Coase theorem.