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Contractual Agreements And Neighbourhood Evolution

by Chris Webster
Professor of Urban Planning
Department of City and Regional Planning, University of Wales Cardiff
Cardiff UK, CF10 3WA


This paper presents a simulation of urban neighbourhood formation and growth based on the economic theory of property rights. The simulation shows that stable and efficient neighbourhoods can evolve from a random distribution of "good" neighbours who offer voluntary reductions in the activities that reduce the welfare of neighbours. However, such neighbourhoods may not evolve and the city may fragment into inefficient neighbourhoods in which the normal prisoner's dilemma dynamic holds; or into unstable neighbourhoods. Which type of city emerges is purely a matter of chance and depends on the initial spatial distribution of good neighbours.


I am grateful to discussants at various conferences for their comments on earlier versions of this paper; and to two anonymous referees.


I. Introduction

Neighbourhoods are more than artefacts of urban scholarship. They can be detected from the train window, delineated on maps, priced by real estate agents and discriminated against by homebuyers. The fact that governments make policy for neighbourhoods and that buyers and sellers in property markets are not indifferent to their attributes means that neighbourhoods are economic entities. And yet the neighbourhood in economic geography, urban economics and planning remains inadequately conceptualised. This paper presents the idea of a neighbourhood as a constantly evolving institution the purpose of which is to govern joint consumption in cities. In this, I follow Olson (1971) who posited a self-interested explanation of group formation, arguing that associations form to provide individual members with shared consumption benefits - including comrade and other member's attributes. Viewed in this way, neighbourhoods are joint consumption spheres and spheres of joint agreement (or contract) over the allocation rules that govern the consumption and production of neighbourhood attributes. To consider neighbourhoods as joint consumption spheres is uncontroversial. Economic models of sub-municipal divisions that broadly rest on the consumption-sharing premise may be found in geographical theories of market areas (Christaller 1966, Losch 1954); urban bid rent theory (Alonso 1964); hedonic price theory (Rosen 1974); local public goods theory (Tiebout 1956); club theory (Buchanan 1965); and theories that synthesise these models (Hochman et al 1995). The notion of neighbourhoods as spheres of joint agreement is more novel and it is one of the paper's objectives to illustrate this concept in some depth. By way of introduction, consider the idea that contracts emerge to create and protect rights to consume private and public goods and services (referred to as property rights from hereon). Property rights may be de jure (legal) or de facto (economic) and the former, which may be created by government or market, evolve to protect the latter. Economic property rights are allocated by initial endowment, markets, governments, voluntary agreement and anarchic actions. Individuals with greater economic, political or physical power might be expected to secure for themselves greater economic rights over scarce shared resources. They do this in various ways including colonising land near to facilities that yield positive externalities. It is argued later in the paper that shared goods and services exist where it is inefficient to allocate them between individuals. In efficient neighbourhoods, voluntary or formal contractual agreements ensure a balance in the demand and supply of neighbourhood externalities and the shared goods are left in the public domain because congestion costs are absent, or at least lower than the transaction costs of assigning property rights to individuals. In a less obvious sense, inefficient neighbourhoods are also spheres of joint agreement about property rights. A decision by an individual to over-consume or over-produce at the expense of neighbours because that is the ambient culture of the neighbourhood is, in effect, an agreement to a common rule of conduct. Greater quantities of negative externalities are left in the public domain because from the individual's or household's point of view, the transaction cost of reassigning rights over bad neighbour risks exceeds the benefits to be gained.

Using these and related ideas, the paper presents a cellular automata (CA) simulation that demonstrates how voluntary neighbourhood management institutions can emerge naturally through bi-lateral neighbour agreements. It illustrates the chaotic nature of neighbourhood evolution however, showing that neighbourhood growth, (spread of contracts), can equilibrate in several states: a city-wide stable neighbourhood; fragmented stable neighbourhoods; fragmented unstable neighbourhoods; fragmented anarchy. Section II elaborates on the ideas of institutional emergence and property rights. Section III presents a behavioural model of voluntary neighbourhood contracts, which underlies the simulation and is based on the propositions in section II. Section IV presents the simulation. Section V discusses the results; and Section VI concludes.

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