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Regulation and Frontier Housing Supply

Regulation is a major driver of housing supply, yet its impact is often difficult to observe directly. This paper estimates frontier costs, which are the costs of producing housing in the absence of regulation, and regulatory taxes, which quantify the monetary value of regulation. Using only apartment prices and building heights, we show that the frontier is identified from the support of supply and demand shocks without recourse to instrumental variables. In an application to new Israeli residential construction, we find that regulation accounts for an average of 43% of housing prices, with significant variation across locations. Higher regulation is associated with proximity to city center, higher density, and higher prices. Our analysis reveals economies of scale in frontier costs at low building heights. Estimation takes into account random structural quality. We show how to construct a lower bound that allows for location-dependent structural quality by assuming weak complementarity between it and locational quality. The bound is most useful in periods follow large price increases. Joint paper with Dan Ben-Moshe.