High land rents suppress productivity
High urban land rents price the most productive workers and firms out of the best locations, misallocating labour and capital and lowering aggregate productivity.
The Claim
When land rents in the most productive cities are very high, workers and firms that would create the most value there are priced out and pushed to less productive locations. This misallocation lowers a nation's total factor productivity (TFP) and output.
The Mechanism
Productive cities offer high wages and returns because of agglomeration — but if the gains are captured as land rent, the cost of being there rises until it offsets the advantage for marginal entrants. The economy ends up with too few people in its most productive places. A land value tax, by discouraging speculative withholding and encouraging dense use of valuable land, can ease this constraint.
The Evidence
- Bakker (2023, IMF) models and measures the channel, finding high urban land rents reduce aggregate TFP via misallocation.
- The result complements a large "housing-as-misallocation" literature (e.g. work on how housing costs in superstar cities lower national output).
Strength of Evidence
Emerging. The theoretical channel is well grounded and recent macro studies support it; the precise magnitude is an active research area.
See Also
Sources
- Bas Bakker (2023), "Unveiling the Hidden Impact of Urban Land Rents on Total Factor Productivity," IMF — wiki summary