When Bigger Isn't Better: Rethinking Local Control and Housing Development
When smaller local governments merged in Denmark, they permitted 50% less housing - challenging conventional wisdom about local control and development.
An interesting little Danish preprint (When Smaller Local Governments Permit More Housing: Reassessing the Effect of Local Control on Land Use Policy) challenges conventional wisdom about local control and housing construction. The research by Martin Vinæs Larsen and Laura Kettel of Aarhus University finds that when municipalities consolidate, they build less housing—not more.
Why it matters: This contradicts the prevailing belief that smaller local governments restrict housing due to NIMBY pressure from nearby residents. The findings suggest the relationship between jurisdiction size and housing policy is more complex than previous research indicated.
The details: Using a difference-in-difference design studying a 2007 reform that consolidated select Danish municipalities, the researchers found:
Areas with increased jurisdiction size saw roughly 50% less housing permitted post-reform
The effect was strongest in areas that experienced the largest reductions in tax base volatility after merging
The decline affected all housing types but was most pronounced for multi-family housing
Results held true for both permitted and completed construction
The effect persisted even when controlling for political makeup, housing prices, and population
Between the lines: The researchers argue smaller municipalities have stronger incentives to permit housing because:
Greater vulnerability to economic shocks makes attracting new taxpayers more urgent
More effective competition with neighboring jurisdictions for residents
Better ability to attract residents due to shorter moving distances between jurisdictions
Need to maintain stable tax revenue through development
The evidence: The study leveraged Denmark's 2007 reform that merged about two-thirds of municipalities while leaving others unchanged. Key findings included:
Merged municipalities saw dramatic increases in size, from ~150 to ~600 square kilometers on average
Population in merged areas roughly doubled to ~53,000 residents
Reform reduced tax base volatility and inter-municipality mobility
Effect was largest in high-housing-price areas that could attract wealthy residents
Commercial/retail development showed no similar decline, suggesting fiscal motivations
Why Denmark matters: The study focused on Denmark because:
Municipalities control zoning and construction permits
Local governments rely heavily on tax revenue (~70% of budget)
Reform created clear treatment and control groups
Granular permit data available across 25-year period
The counterarguments: The researchers addressed alternative explanations:
Not due to administrative efficiency changes
Not explained by changes in permit processing
Not driven by shifts in political makeup
Not caused by changes in housing demand
Effect persists with various statistical controls
The bottom line: The relationship between jurisdiction size and housing construction appears more nuanced than previously understood. While small jurisdictions may face more NIMBY pressure, they also have stronger fiscal motivations to grow their tax base through housing development.
What's next: The researchers note their findings may be most relevant to places with fiscal structures similar to Denmark, where municipalities rely heavily on local tax revenue. The study suggests policymakers should consider the following:
How fiscal incentives shape housing policy
Whether consolidation could reduce end up reducing housing supply
How institutional context affects development patterns
Need for more research in different governance systems