JOURNAL OF URBAN ECONOMICS 2&301-326 (1988) The Market Effects of Zoning Undeveloped Land: Does Zoning Follow the Market?*

Through restricting the uses of land, zoning gives local governments the power to modify the dictates of unconstrained land markets. Many believe, however, that the regulations tend to coincide with, or anticipate, the market solution rather than modify it. The validity of this assertion is an empirical question and has not yet been adequately addressed. The purpose of this paper is to develop and apply an empirical test of the null hypothesis that zoning follows the market. The null hypothesis can be rejected only if land uses under zoning differ from what they would be without zoning. The first task in deriving the test is to differentiate between constrained and unconstrained land market allocations. It is shown that parameter estimates for hedonic price functions, when markets are zoned, cannot be interpreted to imply that the regulations constrain market prices. It is also shown that sample selection bias is a likely source of specification error in estimating hedonic price functions for zoned land markets. ’ Since the sample selection of parcels to zone designations is unlikely to be random, the selection process must be accounted for in ordinary least-squares (OLS) estimation of zone constrained hedonic price functions. Fortunately, the “correction ” for the specification error also provides a test for the market effects of zoning. A bid-price interpretation of hedonic price functions for land is pre-sented in Section II. The sample selection bias issues are also discussed in that section and a formal test for the market effects of zoning is introduced. *Preparation of this article was undertaken while the author was an Assistant Professor a