But we find no sign of this! The municipalities that increased in jurisdiction size started to permit *much less market rate housing* after the reform, relative to the municipalities that did not increase in size. So why did less local control lead to fewer permits???

We think this is because small local gov'ts are more inclined to use housebuilding to attract new taxpayers. For small muni's, it is easier to attract new tax payers (they are closer), and their tax base is more susceptible to negative shocks (e.g., on local employment).