Value capture from infrastructure projects

The economist Donald Shoup pointed to one of the biggest ironies of development, “Why is it so difficult to finance public infrastructure that increases the value of the serviced land by much more than the cost of the infrastructure itself?” The value addition from, say, urban infrastructure projects is well known. I have blogged here, here, and here about land value capture from infrastructure projects.

Arpit Gupta, Stijn Van Nieuwerburgh, and Constantine Kontokosta document the value creation due to the Second Avenue Subway (Q-train) extension in New York City, the most expensive urban mass transit project in recent memory, and use the local real estate prices to analyse the value capture by different stakeholders. 

We find compelling evidence that the 2nd Avenue Subway expansion led to strong changes in commuting patterns. Using our benchmark difference-in-difference specification, we find that residents in areas served by the new subway expansion experience a decline in commute lengths of 3–5 minutes (7.5% reduction). These gains increase to 14 minutes among subway commuters. We find evidence that new migrants into the area, who are likely to be marginal price setters in the real estate market, are disproportionately likely to take the Q-train.

We then link the subway expansion to a sizable increase in real estate values. Our benchmark difference-in-difference specification estimates a 8.3% increase in real estate values when comparing the prices ten years before 2013 to the prices six years after. Prices on the 2nd Avenue corridor increase 11.2% relative to 2003–2006, with nearly half of this gain (5.0%) manifesting during the construction period 2007–2013. The three alternative treatment definitions result in similar point estimates: 5.7%, 6.0%, and 6.8% when com- paring the post-period to the entire pre-period, and 8.2%, 7.9%, 7.3% when comparing the post-period to the pre-2006 period... we apply our baseline 8.3% price increase estimate to the $71 billion in aggregate property value, resulting in a $5.89 billion windfall to private real estate owners... Detailed analysis of property tax data shows that NYC recuperates 30.6% of the increase in market values in present value terms. This amounts to $1.8 billion in extra property tax revenue. As a result, though the subway generated more value than the $4.5 billion cost of construction, this value largely accrues to private landowners, rather than the city government. The city’s own cost-benefit shortfall is $2.7 billion.

This is significant value capture.