Efficient growth boundaries in the presence of population externalities and stochastic rents

Abstract

► Landowners face a population externality that decreases urban rents. ► Growth controls induce landowners to convert earlier than planned, but do not affect their intensity choices. ► Growth controls raise the prices of both urban and undeveloped land. ► The regulator should slacken the growth boundary control once urban rents pass historically high levels. ► The regulator should also tighten the control when urban rents become volatile. This paper investigates how the uncertain demand for urban land affects the design of efficient growth boundaries. Landowners decide both the timing of conversion and the capital intensity when facing a population externality that decreases urban rents. While growth controls induce landowners to convert their land earlier than planned, these controls do not affect their intensity choices. Growth controls also raise the prices of both urban and undeveloped land. To accommodate the uncertain demand for urban land, the regulator should slacken the growth boundary control once urban rents pass historically high levels. In general, the regulator should also tighten the control when urban rents become volatile.