Richard Hornbeck and Daniel Keniston (2014): Creative Destruction: Barriers to Urban Growth and the Great Boston Fire of 1872 <http://www.nber.org/papers/w20467>
If commodities are fully rival and excludible—i.e., the resources devoted to the production of one unit are thereby used up, and cannot be used to aid in the production of a second unit; and if sellers can easily prevent non-buyers from benefiting from what they produce (and non-buyers can easily prevent sellers from imposing costs on them—then, if the distribution of wealth accords with desert and utility, the competitive market economy in equilibrium does the job.
But how often is production really constant returns to scale? And how often are spillovers truly absent? And where and when are markets thick enough to actually be in any form of “competitive equilibrium”?
Four Things Going on…
- Path Dependence
- Thick Markets
- Division of Labor
Hornbeck and Keniston: ABSTRACT:
Historical city growth, in the United States and worldwide, has required remarkable transformation of outdated durable buildings. Private land-use decisions may generate inefficiencies, however, due to externalities and various rigidities. This paper analyzes new plot-level data in the aftermath of the Great Boston Fire of 1872, estimating substantial economic gains from the created opportunity for widespread reconstruction.
An important mechanism appears to be positive externalities from neighbors' reconstruction. Strikingly, gains from this opportunity for urban redevelopment were sufficiently large that increases in land values were comparable to the previous value of all buildings burned.
Five Orienting Questions:
- "We develop a dynamic model of urban growth"—Are there not enough models in the world? What is the value added here?
- Where does the land value data come from?
- How should we interpret the increase in land values in unburned areas at the edge of the fire?
- Taking these results seriously, what is the implied first-best social-planner density policy?
- What system of land rights, taxes, and subsidies would get us to that density policy?