Behaviors and housing inertia are key factors in determining the consequences of a shock in transportation costs

This paper investigates the consequences of a sudden increase in transportation costs when household behaviors and building inertia are accounted for. A theoretical framework is proposed, capturing the interactions between behaviors, transportation costs and urban structure. Numerical simulations show that changes in households and landowners’ choices reduce significantly the long-term adverse effects of a shock in transportation costs. Indeed, the shock translates, over the long run, into a more concentrated housing that limits households utility losses and maintains landowners’ income. But, because of building inertia, the shock leads first to a long transition, during which the adjustment is constrained by a suboptimal housing-supply structure. Then, households support larger losses than in the final stage, though lower than with no behavior adjustment, and landowners experience a large decrease in their aggregate income and an important redistribution of wealth. Thus, behaviors and building inertia are key factors in determining the vulnerability to transportation price variability and to the introduction of climate policies. Our policy conclusions are that: (i) if a long-term increase in transportation costs is unavoidable because of climate change or resource scarcity, a smooth change prevents to some extent the negative transition effects and (ii) fast-growing cities of the developing world can reduce their future vulnerability to shocks in transportation costs through the implementation of policies that limit urban sprawl.