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Abstract

Spatial equilibrium implies that distant factors are correlated with proximate locations through market mechanisms. Using this logic, we develop a novel approach for handling price endogeneity in reduced-form land use models. We combine a control function approach with a duration model of land development to shed new light on the role of price and supply-side factors that influence subdivision development at a micro level. We find that failure to control for endogeneity results in large differences in estimates of residential land supply price elasticities. Specifically, we find an elasticity of 2.06 compared to 0.67 in a model that ignores potential endogeneity.

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