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II. Institutional Evolution, Property Rights And Neighborhood Efficiency

Society chooses between a variety of mechanisms to allocate scarce resources and these include governments, markets, voluntary agreements and anarchy. All are active to some degree in effecting the allocation of the shared territorial goods that make up neighbourhoods and the institutions that implement them constantly evolve in shape, size and function. Two important questions underlie many academic and practical discussions about urban management and planning: what are the more efficient institutional forms and what is the efficient size of a particular institutional form? The class of simulation presented in this paper and elsewhere by the author (Webster and Wu 1999a, 1999b, 2001, Wu and Webster 1998, 2000) allows for simultaneous analysis of both efficiency questions. The interdependence between spatial institutions and spatial attributes (neighbourhood public goods) can be made explicit in the language of property rights theory following Alchian 1965, Cheung 1969, Barzel 1997. On the one hand access to neighborhood goods is determined by the nature of the rights governing their consumption; and these property rights (de jure and de facto) therefore shape urban morphology. On the other hand, property rights are determined by urban morphology and it is this circularity that leads to institutional evolution. Consider the following proposition:


Proposition 1: When the value of a neighbourhood attribute (local public good) changes or the transaction costs of assigning rights to it change there will be a corresponding demand to adjust the assignment of property rights over it.


Britain's House of Lords recently debated a Transport Bill that proposes to grant residents yet more rights over local streets in the form of statutory Quiet Lanes and Home Zones (United Kingdom Parliamentary Debates House of Lords (2000)). Locally imposed speed restrictions are one expression of Proposition 1 as are road and lane closures and smart-card controls over access to local streets. The raft of local traffic management measures currently being enacted in cities throughout the developed world are a response to demands for a reallocation of property rights in the light of (a) falling value of shared consumption goods (roads) and (b) falling (transaction) costs of property rights assignment. If roads were not becoming more congested there would not be a widespread demand for greater control. If there had not been a fall in the costs of technology (remote policing, smart-card pricing and cordoning etc.) or of the political cost of regulations there would not be a demand by residents for reallocating property rights over access and use. The same may be said of residential club communities such as condominiums and gated suburbs. The rise in the (negative) value of neighbourhood security risk leads to demand for reassignment of property rights over shared space and other facilities. Technological and product innovations (smart-card access, automated security devices, new markets in private neighbourhoods) reduce the costs of such reassignment and thus the institutions governing joint consumption in cities evolve. Proposition 2 is a stronger form of Proposition 1, stating that rights over neighbourhood goods will be delimited wherever cost-efficient. An interesting and contentious corollary of this is that the public realm can be understood as a residual category - the spatial domain over which unassigned (public domain) rights prevail.


Proposition 2: Property rights assignment over neighbourhood attributes is constrained by the high transaction costs of rights delimitation and enforcement, meaning that many neighbourhood attributes remain in the public domain.


This helps define a spatial dimension to a theory of institutional evolution, which can be thought of as a behavioural theory of the public realm. Public, private and club realms constantly evolve in response to the shifting demand for property rights.

Propostition 3 is even stronger, suggesting that there are real costs of leaving neighbourhood attributes in the public domain. These are the costs that arise when neighbours compete to consume congested shared-resources - costs that could be avoided by appropriate assignments of rights over those resources.


Proposition 3: Neighbourhood attributes left in the public domain will be subject to competitive behaviour resulting in rent dissipation as neighbours/ citizens expend resources that accrue to no-one.


To the degree that governments, markets or voluntary associations of individuals perceive such costs, institutional innovation and adaptation will occur. If the costs of the innovation (transaction costs) exceeds the competition costs that would prevail without property rights assignment then the institutional innovation is inefficient. Government administered property rights reassignments (via statute and policy) arguably run a greater risk of this kind of inefficiency than market reassignments since the latter are shaped by more accurate demand information in the form of prices. In modern leasehold communities the public domain is privately owned and actively managed - as with much publicly consumed land in pre-modern society. In such situations, Proposition 3 might be too strong in the sense that where joint consumption is controlled by design or management, congestion is not inevitable and some property rights are more inefficiently left unallocated. A well designed and managed public garden space in a condominium development supplies neighbourhood attributes that are typically unallocated between individual co-owners. Rights over parking space in the same development, by comparison, are likely to be allocated to unit owners. This is because of the congestion; rent-seeking behaviour and transaction costs of conflict resolution that would prevail if parking rights were left unallocated.

The remainder of the paper examines an interesting class of voluntary institution: one that is crucial to the composition and evolution of cities. The institution is the collective agreement that renders many residential neighbourhoods distinct and stable - or the lack of it that renders them indistinct or unstable. Formally constituted homeowners' associations are rare outside of the U.S. and yet cities the world over contain well-functioning neighbourhoods governed by informal cultures of consumption and undocumented rules of behaviour. This is so with and without effective government regulation of land use and environmental nuisances. Where collective action is not the cause of these informal neighbourhood norms, then individual action must be and it is worth asking how this works. As an institutional phenomenon a neighbourhood may be thought of as a joint producer-consumer club in which every household stands to gain if it and all others consume and/or produce (home investment 'products' etc) at socially optimal levels. In this sense, the neighbourhood is co-produced. However, one must ask what the individual incentive is to voluntarily adjust consumption and home-based production when free-riding will maximise individual payoff. One answer is that the economists have got it wrong and that the prisoner's dilemma is a fiction. Or perhaps the difference between successful and unsuccessful neighbourhoods is accounted for by differences in preferences -- a preponderance of public spirited residents overcome the collective consumption dilemma faced by the more selfish residents of less cohesive neighbourhoods. The idea is worth pursuing and it has obvious similarities with Tieboutian notions of spatial sorting into homogenous preference groups. However an alternative explanation of neighbourhood variation is possible that is consistent with the conventional view of residents as individual maximisers. It is an atomistic theory of neighbourhood formation and rests only on the assumption that individuals will exploit mutual benefits in bi-lateral negotiations. The following section elaborates this idea.

Before doing this, however, it will be useful to comment further on why an atomistic neighbourhood might be viewed as a club. Consider the way in which a sport clubs functions. An entrepreneur provides a set of facilities and organises a constitutional framework within which members can participate. They participate not for the good of the club but for their own individual enjoyment. A club may have less or more rules. A swimming pool with no rules apart from the requirement that members should pay a joining fee will develop its own consumption culture over time -- and possibly evolve a constitution to avoid dissipation of benefits. Many residential neighbourhoods are rather like the swimming club. Residents buy-in to a locality which offers them certain facilities including any benefits derived from the personal characteristics of other residents and the benefits of other residents' home investment expenditure. The property market created the club facilities: developers, with subsidy from the municipality perhaps, created the basic infrastructure and subsequent waves of residents created social and environmental capital. The individual maximising behaviour of resident members determines the efficiency of the neighbourhood's consumption culture just as it does in the swimming club. The atomistic neighbourhood is organised at one level, therefore, by market institutions, which governs the allocation of property rights. Without the organising disciplines of the property, land, and insurance markets and the laws that sustain them, neighbourhoods would be truly anarchic. At another level, it is the capricious behaviour of individuals within a neighbourhood that govern the evolution (or not) or additional layers of informal and more formal governance institution. Although these may be seen as having more of a purpose than the market (and more clearly conforming to the popular notion of a club); the property market too, has a purpose -- to balance demand and supply, to price properties in relation to benefits received -- and home-owners buying into a neighbourhood are making a statement about the benefits they expect to receive. In this sense, that part of the locational premium derived from the local neighbourhood, might be thought of as a payment (to the outgoing owner) for securing a scare place in the neighbourhood club. The remaining sections elaborate on the capriciousness of neighbourhood institutions that evolve (or fail to evolve) to assign property rights over neighbourhood attributes that are not typically priced by markets.

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