Evaluating the Social Optimality of Durable Public Good Provision using the Housing Price Response to Public Investment∗

Recent empirical work in public finance uses the housing price response to public investment to assess the efficiency of local durable public good provision. This paper explores the theoretical justification for this technique. It points out that the logic justifying the technique for evaluating non-durable public good provision does not translate to the durable case. A model in which investment is determined by the interaction between a budget-maximizing bureaucrat and a community’s residents is used to demonstrate that the technique can falsely predict under-provision, falsely predict over-provision, or perform without error. Stephen Coate Department of Economics Cornell University Ithaca, NY 14853 [email protected] Yanlei Ma Cornerstone Research Boston, MA 02116 [email protected] ∗An earlier version of this paper was entitled “Evaluating Durable Public Good Provision using Housing Prices”. We are grateful to Damon Clark and Jesse Rothstein for helpful comments and to Gregory Besharov, Nicolai Kuminoff, Ross Milton, and Chris Timmins for useful discussions. The views expressed in this paper are those of the authors and do not necessarily reflect those of Cornerstone Research.