Abstract
AbstractThis paper shows that having access to a fast Internet connection is an important determinant of capitalization effects in property markets. Our empirical strategy combines a boundary discontinuity design with controls for time-invariant effects and arbitrary macroeconomic shocks at a very local level to identify the causal effect of broadband speed on property prices from variation that is plausibly exogenous. Applying this strategy to a micro data set from England between 1995 and 2010 we find a significantly positive effect, but diminishing returns to speed. Our results imply that disconnecting an average property from a high-speed first-generation broadband connection (offering Internet speed up to 8 Mbit/s) would depreciate its value by 2.8%. In contrast, upgrading such a property to a faster connection (offering speeds up to 24 Mbit/s) would increase its value by no more than 1%. We decompose this effect by income and urbanization, finding considerable heterogeneity. These estimates are used to evaluate proposed plans to deliver fast broadband universally. We find that increasing speed and connecting unserved households pass a cost–benefit test in urban and some suburban areas, whereas the case for universal delivery in rural areas is not as strong. (JEL: L1, H4, R2)
Highlights
The importance of speed is well recognized
As put by Kuminoff et al (2013, p. 1038) this interpretation is valid only when the analyst can reasonably answer ‘yes’ to the following questions: “Do the data describe a single geographic market connected by a common hedonic price function? Was the gradient of the price function constant over the duration of the study period? Are the “treated” houses in the sample representative of the population of interest?” As for the single geographic market, we show below how to extend our estimates to each catchment area covered by Local Exchange (LE), which can be distinguished by urbanization and by income levels
If a household was interested in this higher level of speed, but could not find it as it was not available for various reasons, we can use our results to estimate the benefit to that household from a speed increase
Summary
The importance of speed is well recognized. Higher speed brings workers and firms closer together and increases welfare due to travel-time savings and agglomeration benefits. Infrastructure projects—such as new metro lines, highways, high-speed rail or airports, all of which presumably increase speed within or between cities and regions—have long been popular among policy makers. Infrastructure projects—such as new metro lines, highways, high-speed rail or airports, all of which presumably increase speed within or between cities and regions—have long been popular among policy makers. We deal with a different type of speed: digital speed. Does it matter how quickly one can surf the Internet using broadband connections? Predictions about the impact of the Internet and broadband infrastructure have been optimistic and sometimes outlandish. Policy makers expect broadband to lead to job creation and economic growth. Its Digital Agenda identifies two targets that are even more aspiring than the US’s: by 2020, every European citizen will need access to at least 30 Mbit/s, and at least 50% of European households should have Internet connections above 100 Mbit/s.7
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