Housing Supply Elasticity and Rent Extraction by State and Local Governments

Governments may extract rent from private citizens by inflating taxes and spending on projects which benefit special interests. Using a spatial equilibrium model, I show that less elastic housing supplies increase governments’ abilities to extract rents. Inelastic housing supply elasticity, driven by exogenous variation in local topography, raises local governments’ tax revenue. I find that public sector workers, one of the largest government special interests, capture a share of these rents either through increased compensation when formal collective bargaining is legal or by increased corruption when collective bargaining is outlawed.

Rebecca Diamond

Stanford Graduate School of Business

July 24, 2015

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