Why Zoning Is Too Restrictive

Economists estimate that zoning regulations raise house prices, lower productivity, and reduce aggregate welfare, yet regulations remain widespread. We develop and solve a model in which fragmented zoning authority leads to overly strict regulations: Homeowners impose stricter regulations to mitigate local congestion but fail to internalize the broader impact on metro-wide affordability. Empirically, the Herfindahl-Hirschman index of local governments explains 12% of the variation in zoning restrictiveness. Using an instrument based on 19th-century municipal fragmentation, we show that greater fragmentation leads to stricter zoning and higher housing costs. These findings suggest that centralizing zoning decisions could alleviate housing affordability challenges.

This paper was accepted by Lukas Schmid, finance.

Funding: This work was supported by the Social Sciences and Humanities Research Council of Canada [Grant AWD-027881 SSHRC 2023].

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2025.02844.