Capitalization as a Two-Part Tariff: The Role of Zoning∗

In speculating that local public goods could be efficiently provided, Tiebout (1956) envisioned head taxes which would both finance public goods and price access to them. In practice, head taxes are not available, potentially leading to distortions. Hamilton (1975, 1976) responded that zoning can mimic a head tax by creating a price (or “admission ticket”) at the border. While the debate over the efficiency of the local provision of public goods continues, modern empirical work, including structural models and simple hedonic pricing models, routinely imposes the restriction that amenities are capitalized through the price of land or housing per unit. It has ignored the possibility of capitalization into tickets. This paper generalizes previous work to show more precisely how land-use restrictions create tickets. It further advances the literature by using a unique national level dataset of property transactions matched to very local neighborhood amenities to measure the extent to which local public goods are capitalized into “intercept” (ticket prices) versus “slope” effects (varying prices per unit). We find evidence for both, but the intercept effect is strongest when land use regulation is greater, as predicted by the model.