The Production Function for Housing: Evidence from France

In today's seminar Laurent Gobillon, from the Paris School of Economics, discusses his paper on The Production Function for Housing: Evidence from France

Abstract: 

We propose a new non-parametric approach to estimate the production function for housing. Our estimation treats output as a latent variable and relies on the first-order condition for profit maximisation with respect to non-land inputs by competitive house builders. 

For parcels of a given size, we compute housing production by summing across the marginal products of non-land inputs. Differences in non-land input investments are caused by differences in land prices that reflect differences in the demand for housing across locations. We implement our methodology on newly-built single-family homes in France.

We find that the production function for housing is reasonably well, though not perfectly, approximated by a Cobb-Douglas function and close to constant returns after taking care of some estimation concerns. We estimate an elasticity of housing production with respect to non-land inputs of about 0.65.