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Sclerosis of the City

Land Assembly and Urban Change

Leah Brooks and Byron Lutz

July 2011, English

Markets are efficient when prices and quantities are free to respond to shocks. Does this type of efficiency hold for urban land markets? We ask whether the amount of land assembled—the quantity of individual pieces of land legally joined together—is consistent with that of a competitive market. If economic forces cannot modify the size and shape of land—and the roads, buildings and homes that land borders dictate—cities forfeit economic growth. Our simple theoretical framework describes land assembly under the assumption of perfect competition in the market for assembly. We compare this equilibrium to an environment in which frictions, such as holdouts and public regulation, inhibit market forces. The model yields two empirically testable hypotheses. First, the price of land sold for assembly should not exceed the price of land sold for other uses. Second, because the opportunity cost of assembling large parcels exceeds that of small parcels, small parcels should be more likely to assemble. We test these conjectures using a novel dataset: we follow each of the 2.2 million parcels in Los Angeles County over an eleven year period and observe all instances of assembly. We find that to-be-assembled land trades at a 50 to 65 percent premium, and developers prefer to assemble larger, not smaller, parcels. This robust repudiation of efficiency in land assembly suggests a sclerosis in urban development and a rejection of an efficient model of urban land markets.