“Creative destruction: Barriers to urban growth and the great Boston fire of 1872” (Richard Hornbeck)

In the second session Richard Hornbeck (Harvard University) presented his paper “Creative Destruction: Barriers to Urban Growth and the Great Boston Fire of 1872”. The paper analyses new plot-level data in the aftermath of the Great Boston Fire of 1872 to study externalities and transaction costs related to the transformation of outdated durable buildings. He estimates substantial economic gains from the created opportunity for widespread reconstruction by the fire.

Background:

In November 1872, a small fire spread through a large section of Boston’s business district, eventually destroying 776 buildings over 65 acres of the downtown Boston area. Boston firefighters were unable to stop the fire before it spread, due partly to sickness amongst the fire department’s horses that prevented the rapid deployment of equipment to the burning area. The fire burned for 22 hours, eventually stopping with the arrival of massive firefighting resources from surrounding areas. The fire killed 20 people and caused approximately $75 million in damage, or 11% of the total assessed value of all Boston real estate and personal property.

Analysis:

The empirical analysis in the paper uses a new detailed plot-level dataset, covering all the plots burned area and surrounding areas in 1867, 1872, 1873 and 1893.

Findings:

  1. The land values increased substantially from 1872 to 1873 in the burned area, relative to the unburned area. These estimates imply economically substantial gains from the opportunity for widespread reconstruction, as individual landowners previously had the opportunity to replace their own building.
  2. Land values also increased immediately in nearby unburned areas, relative to further unburned areas. The nearest unburned areas received an increase in land value similar to the burned area, and the estimated impact declines until leveling at around 1400 feet (approximately 5-6 blocks or 25-35 buildings away).
  3. Building values also increased substantially in the burned area, following reconstruction, and converged over time. These impacts were greatest at the lowest quantiles of building values, reflecting replacement of the worst building stock, but building values increased even at the highest quantiles. Seen through the lens of the model, these results suggest that even the most recently constructed (and, therefore, the highest value) buildings were replaced with substantially better buildings, consistent with neighborhood externalities.

Policy Implications:

The historical episode of Boston fire highlights the challenges of maintaining economic growth with increasingly heterogeneous vintages of capital stock, to such a degree that the destruction of durable capital generated substantial economic gains. Positive externalities from capital replacement may be lower in other contexts, due to differences in the economic or policy environment, but these impacts will be salient in contexts with a return to coordinated investment.

By Vikas Dimble, Country Economist, IGC India Central