Creative Destruction: Barriers to Urban Growth and the Great Boston Fire of 1872∗

Urban growth requires the replacement of outdated buildings, yet growth may be restricted when landowners do not internalize positive spillover effects from their own reconstruction. The Boston Fire of 1872 created an opportunity for widespread simultaneous reconstruction, initiating a virtuous circle in which building upgrades encouraged further upgrades of nearby buildings. Land values increased substantially among burned plots and nearby unburned plots, capitalizing economic gains comparable to the prior value of burned buildings. Boston had grown rapidly prior to the Fire, but negative spillovers from outdated durable buildings had substantially constrained its growth by dampening reconstruction incentives. ∗For comments and suggestions, we thank Nava Ashraf, Leah Boustan, Leah Brooks, Bill Collins, Brad DeLong, Bob Ellickson, Don Fullerton, Matt Gentzkow, Ed Glaeser, Claudia Goldin, Tim Guinnane, Hugo Hopenhayn, Matt Kahn, Emir Kamenica, Larry Katz, Michael Kremer, Naomi Lamoreaux, Gary Libecap, Neale Mahoney, Sendhil Mullainathan, Derek Neal, Trevor O’Grady, Chris Udry, John Wallis, Bill Wheaton, and seminar participants at American Bar Foundation, Berkeley, Chicago, Chicago Booth, Chicago Law, Colorado, EIEF, George Washington, Harvard, Illinois, Lincoln Institute of Land Policy, MIT, NBER, Northwestern, Pittsburgh, PUC-Chile, UCLA, and Yale. For financial support, we thank Harvard’s Taubman Center for State and Local Government and Harvard’s Warburg Fund. For excellent research assistance, we thank Louis Amira, James Feigenbaum, Jan Kozak, Julius Luettge, Michael Olijnyk, Joseph Root, Sophie Wang, Alex Weckenman, and Kevin Wu, in addition to many others for their data entry work. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. Richard Hornbeck: Professor of Economics and Neubauer Family Faculty Fellow, University of Chicago Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637. [email protected]. Daniel Keniston: Assistant Professor of Economics, Department of Economics, Yale University, 27 Hillhouse Avenue, Room 22, New Haven, CT 06520. [email protected]. Cities in the United States have undergone remarkable transformations, as modern metropolises have emerged from small towns. This historical process of building construction, obsolescence, and reconstruction has in large part been managed by private landowners, though substantial inefficiencies may arise when landowners’ construction decisions do not internalize impacts on neighbors. Zoning regulations and building codes seek to prevent some negative externalities on neighbors, though small landowners are generally not compensated for building investments that generate positive externalities on neighbors. Landowners may then respond insufficiently to increased demand for urban spaces, constraining urban growth and a core component of overall economic growth. This paper analyzes the Great Boston Fire of 1872, which destroyed a section of downtown Boston, as an opportunity to explore constraints on urban growth that may have been released by the Fire. Contemporaries speculated that the Fire generated benefits from the opportunity for widespread reconstruction, though these reactions may have simply reflected the newness of buildings in the burned area and a desire to take positives from an otherwise disastrous event. We formalize this intuition with a model of urban growth in which a Fire might appear beneficial because destroyed buildings are replaced with newer morevaluable buildings, but forcing landowners to replace their buildings generates no economic benefits in the absence of cross-plot externalities. With cross-plot externalities, however, widespread simultaneous reconstruction after the Fire does generate economic gains: building reconstruction increases land value in nearby areas and encourages landowners to reconstruct even higher quality buildings that generate further positive spillover effects. The empirical analysis uses a new plot-level dataset, covering all plots in the burned area and surrounding areas in 1867, 1869, 1871, 1872, 1873, 1882, and 1894. City tax assessment records provide data on each plot’s land value, building value, land area, and occupant characteristics. Using supplemental data on plot sales from Boston’s Registry of Deeds, we find that assessed values align closely with the available sales data in the burned and unburned areas both before and after the Fire. While there are challenges in separately assessing land value and building value, we also find no difference between assessed land values for developed plots and nearby vacant plots. We estimate that the Fire generated substantial economic gains, capitalized in higher land values. Land values increased substantially in the burned area, and by a similar magnitude in nearby unburned areas, with the estimated impact declining in distance to the Fire boundary until leveling off at around 1,339 feet (25 – 30 buildings away). If we assume the Fire had no impact beyond 1,339 feet, the implied total increase in land value is comparable to the total value of buildings burned in the Fire. Building values also increased substantially in the burned area after reconstruction. Some