Spillovers from Price Regulations: Evidence from Rent Control in Cambridge, Massachusetts

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This research project investigates channels through which spillovers operate in the housing market by exploiting variation induced by the elimination of rent regulation. The project aims to improve our understanding of housing market externalities, the direct and indirect effects of price controls, and to take advantage of a unique policy experiment to explore core issues in urban economics such as the evolution of neighborhoods and the capitalization of amenities.Several components of the project exploit a rich new data set on rent regulation in Cambridge MA. The data set includes the precise location for all rent controlled units in Cambridge until 1995, when a statewide referendum eliminated rent control. We link the data set to all housing market transactions in Cambridge and surrounding communities, building permitting activity, data from the City Census, which includes the identity, age and occupation of more than 80% of residents, and information on the credit profile of residents aggregated at a fine geographic level specific to rent controlled and non-rent controlled groups. The project investigates the impact of the elimination of rent control on the prices of uncontrolled condominiums, single and multi-family housing. Preliminary analysis suggests that there is a substantial impact of the elimination of rent control on the prices of uncontrolled houses in neighborhoods with large amounts of pre-existing rent controlled units. We will carry out further analyses of the database to explore the reasons for the price change. One mechanism involves changes in the level of building permitting activity due to investment complementarities between units, while the second involves measuring changes in the allocation of individuals to housing after the elimination of rent control. Additional empirical work will examine the direct impacts of the end of rent regulation. Intellectual Merit:The project documents previously unknown facts about the nature and extent of spillovers in the housing market. It includes the development of new databases which allow for understanding various mechanisms which generate the spillovers. It raises new questions about measuring the welfare costs of price controls.Broader Impact:Regulations affecting housing markets are widespread and are often predicated on the existence of spillovers. An improved understanding of the underlying forces generating spillovers in housing can help shape policies which influence housing investment and subsidies. Moreover, price controls are present in many segments of the economy and an important aspect of these controls are the effects they have on uncontrolled sectors of the market. Finally, rent control is often considered a textbook example of how price controls affect the functioning of supply and demand. The detailed nature of our dataset allows for aspects of this research to be integrated into teaching. The project will also support graduate students.