DP16023 The option value of vacant land: Don't build when demand for housing is booming
Urban structures and urban growth rates are highly persistent. This has far-reaching implications for the optimal size and timing of new construction. We prove that rational developers postpone construction not because prospects are gloomy, but because they are bright. For cities that are growing, a positive growth shock causes rational investors not to speed up investment but rather to postpone it. In our model, the observed heterogeneity in floorspace density between cities can be explained not by differences in population levels, but in growth rates.