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Environment and Planning A 2003, volume 35, pages 133 ^ 149


The rebound of private zoning: property rights and local

governance in urban land use

F Frederic Deng
Department of Geography and Planning, AS218, State University of New York at Albany,
Albany, NY 12222, USA; e-mail: fdeng@albany.edu
Received 1 May 2002; in revised form 25 July 2002

Abstract. NIMBY and regulatory takings are two well-known phenomena associated with land-use
change in US cities. I claim that both are manifestations of what economists refer to as a `hold-up
problem' and analyze how fast-growing private zoning, namely the ground-lease system and common
interest developments, have evolved to respond to these problems. My argument is based on two
spatial facts: the consumption of local collective goods is bundled with land and property; property
owners have only limited ex post mobility. By comparing five different combinations of property rights
and land use control, I submit that private zoning is most efficient in relieving the agency problem in
urban land use. Policy implications of NIMBY and equity issues of private zoning are also discussed.

Most land-use change in US cities now involves one of two significant controversies,
widely referred to as the problems of NIMBY (not in my back yard) and `regulatory
takings'. Both have been the topic of widespread commentary and analysis. I claim that
both are manifestations of what economists refer to as a `hold-up problem'. Seen in this
light, it is not surprising that an institutional response is evolving before our eyes to
mitigate both problems. This is the return of private zoning which has made a sig-
nificant comeback in the USA in recent years. Some authors have referred to this as a
``quiet revolution'' (Barton and Silverman, 1994). The Economist (2001) heralds this
phenomenon as ``smart growth'' that solves many problems of big metropolitan cities.
Perhaps it can also be seen as a Hayekian response, an evolution of market institutions
that helps to resolve social problems.
For some years, critics have maintained that conventional zoning and city planning
are broken. Nelson (1977) showed that zoning is a neighborhood collective property
right that may be best transacted by private neighborhood associations. Attempts to
render zoning as something to be somehow disbursed by a scientific plan are highly
implausible and reminiscent of many other `fatal conceits'.
In this paper, I refer to two basic types of private zoning: (1) contracts surrounding
ground-lease-based land uses (proprietary communities); and (2) common interest
developments (CIDs). The ground-lease system is more common in retail development;
typical examples are shopping centers and malls. In a ground-lease system, the pro-
vider of local collective goods also owns the land and improvements and land/space
users lease the properties from the landowner. In residential land use, private zoning is
mostly in the form of CIDs. A CID is basically a combination of individual ownership of
private property and common ownership of common spaces. A residential community
association or homeowners' association that runs with the land owns and manages the
common properties.
Both types of private zoning have been growing in recent years. The Directory of
Major Malls (2000) lists as many as 3436 of them in North America. Estimates also
reveal that the proportion of housing units governed by private community associations
has grown from 1% of the housing stock in 1970 to 14.7% in 1998 (Treese, 1999).
134 F F Deng

These trends represent a comeback. Long before the introduction of public zoning
by municipal governments in the early 20th century, private zoning in the form of
private covenants was the established method of land-use control in the United States.
This was also true for England in the 19th century (Davies, 2002). The sequential
appearance of private and public zoning may explain why many commentators have
seen public zoning as a response to the failure of private property markets. But a static
view of private zoning would not explain its recent return.
The comeback of private zoning introduces several related research questions: (1) Why
do we observe the rebound of private zoning and what explains NIMBY and `regulatory
takings' in public zoning? (2) What are the trade-offs involved in various combinations of
property rights and land-use control, especially between public zoning and private zoning?
(3) What are the policy implications of the rebound of private zoning?
My answers to all these questions depend on two fundamental spatial facts. First, the
consumption of collective goods is bundled with land and property. Second, homeowners
have limited ex post mobility even though they may enjoy substantial ex ante choice.
These two spatial facts imply a potential hold-up problem between landowner and
collective goods provider. Since the consumption of collective goods is bundled with
land, there is a contractual relationship between property owner and collective goods
provider. Homeowners' limited ex post mobility points to high asset specificity. Prop-
erty owners and collective goods providers could both hold up each other because of
relationship-specific investments. NIMBY and regulatory takings are important exam-
ples of the hold-up problem under traditional public zoning. Hence, it is efficient to
integrate the property owner and the collective goods provider if there is substantial
uncertainty in their contractual relationship.
Along with others (Fischel, 1985; Nelson, 1977) I regard zoning or land-use control
as a collective neighborhood property right. By comparing five different combinations
of property rights and land-use control, I identify several factors that are crucial to
efficient institutional arrangements in urban land use. First, the impossibility of
comprehensive contracts and the likelihood of costly litigation suggest that relying
only on private covenants is problematic. Public zoning basically separates landowner
and collective goods provider, creating agency problems. Two main types of private
zoning, the ground-lease system and CIDs, are institutional responses to the hold-up
problem in urban land use. Both integrate landowner and collective goods provider and
form a market of local governance. This trend is also seen in countries with only
publicly owned urban land. In contrast, the combination of public property and public
zoning incurs extra costs because they cannot easily be synchronized because of their
multipurpose nature.
Among the five major types of land-use control, I find that private property plus
private zoning, the form that is growing fastest in the USA, is most efficient for
modern heterogeneous metropolitan areas. Cases such as regulatory takings are largely
absent in private zoning. At least for local collective goods, private zoning also relieves
the NIMBY problem, especially when developers combine various forms of property
rights and governance structure to control opportunistic behavior of related parties.
The role of developers under the external discipline of market competition is important
throughout the process of private zoning.
My analysis of the bundling of local collective goods provision and real property
also indicates that private zoning does not necessarily mean all collective goods have
to be provided by landowner(s). On the contrary, it is various transaction cost factors
that determine if it is efficient to bundle the provision of a particular collective good
with land. An assumption in most of my analysis is that the efficient scales of
collective goods are the same. If they are different, then there is inevitably a hierarchy
Property rights and local governance in urban land use 135

of institutions, as often observed in the real world. That might be why most private
zonings still function at local scale under conventional government, but it relieves the
latter of many traditional functions that cannot cope well with highly decentralized
demand for local collective goods. Even for conventional government, the hold-up
problem in urban land use determines a big difference between higher level government
and suburban local government (Fischel, 2001).
The next section introduces the analytical framework. I then compare public and
private zoning with private property rights. Three other combinations of property
rights and local governance structure are discussed in the third section. The last section
discusses NIMBY and some equity issues.

Analytical framework
The building blocks for my analysis are two fundamental spatial facts: bundled
consumption of land and local collective goods and the limited ex post mobility of
homeowners. These two facts introduce the key issue in this paperö the `hold-up'
problem between landowner and collective goods provider. By using analytical tools
from the new institutional economics, I hope to gain a better understanding of many
land-use issues, such as NIMBY and regulatory takings, as well as the endogenous
evolution of urban institutions and property rights.
Two fundamental spatial facts in urban land use
I begin with the two fundamental spatial facts of life that are crucial to understanding
urban property rights and land use. The first spatial fact is that the consumption of
land and local collective goods is bundled together. Traditionally, private goods and
collective goods are usually treated separately (Samuelson, 1954). Over the last half
century, this conventional wisdom has been challenged by various writers, including
Buchanan (1965) who formulated club theory. Foldvary (1994) argued that most public
goods are actually territorial collective goods, only available within some bounded
area. The notion of a territorial collective good itself suggests that land and local
collective goods are consumed together. In a broad sense, human societies have always
been organized territorially since the birth of civilization.
Bundled consumption of land and collective goods does not mean that their
provision is necessarily bundled together. Traditional fee simple ownership under a
government-tax system is a typical example of the separate provision of land and
collective goods. Therefore, it is important to understand what determines their
bundling or separate provision. Although intuitively appealing, technical comple-
mentarity does not dictate bundled provision. It is often the market that performs
the matching and aggregating functions. For example, many people buy computers
and monitors from different producers. The reasons for bundled provision must go
beyond technical complementarity.
The second spatial fact is that landowners have only limited ex post mobility even
though they may enjoy substantial ex ante choice. Plausibly, there are two types
of mobility that are relevant. The first involves people's routine (often daily) physical
mobility, which includes costs such as commuting time and vehicle expense. These are
closely related to the nature of the available ground transportation technology. This
type of mobility affects choice in job and housing location.
The second type of mobility involves residential relocation. People often make
specific investments related to a particular spatial location. Therefore, the cost factors
that affect the second type of mobility are critically related to land or property
136 F F Deng

Common sense suggests that transaction costs (narrowly defined) from owning the
land and physical structure are much higher than those from renting. There are more
legal procedures, financing considerations, agency fees, insurance costs, and even
longer search time for acquiring or disposing of landownership. A second group of
costs is directly associated with specific investments related to landownership. Invest-
ment in a parcel of land can be more accurately described as an investment in the
location, which is defined by its relationship to other locations inside the macrosocial
and economic space. For example, retailers have to be located near consumers; their
investment in land and structures is specific to the neighborhood's market potential.
Once the neighborhood declines or the original location factors change, the retailer or
property owner suffers loss. Because an important determinant of land price is collec-
tive goods provision, which is beyond the control of a single landowner, any investment
in land is specific to collective goods provision. This suggests a critical distinction
between renters and owners. Owners are most likely to invest in the future of the
neighborhood, in this case collective goods provision, even though they may leave
soon after the purchase; renters only have to pay for neighborhood goods consumption
in the current year. Their risk exposure to collective goods provision is very different.
An immediate implication of homeowners' limited ex post mobility is that the
Tiebout model (1956) is undermined. Property owners could not simply vote with their
feet without any financial loss from their property investment. Hence, an efficient
pattern of government provision of local collective goods cannot be obtained via
Tiebout sorting under a traditional government-tax system.
Transaction cost economics
Because my approach is substantially based on transaction cost economics, I digress
for a brief review of major developments in this field. Transaction cost economics
begins with the analysis of the firm. In 1937 Coase first pointed out that within a
firm the parties to a transaction lower the transaction costs of discovering relevant
prices and negotiating separate contracts for most exchanges in the spot market (see
Coase, 1991). In Williamson's framework (1975; 1985), opportunism and bounded
rationality are the two fundamental behavioral assumptions. With opportunistic agents,
the higher the mutual dependency, the more probable that one party is going to be
taken advantage of by the other. On the other hand, bounded rationality determines
that no contract can be complete because future events cannot be fully anticipated,
let alone the high costs of drafting contracts. Among market, hierarchy (such as a firm
within which the price mechanism is suppressed), and hybrid forms, choice of the most
efficient arrangement rests largely on the extent to which the parties share interdepen-
dent relationships. The essence of Williamson's framework is the `hold-up' problem,
which was further formalized by Grossman and Hart (1986) and Hart and Moore
(1990) in the incomplete-contract literature. They argue that contracts are unlikely to
be complete and ex post renegotiation becomes crucial. Parties with investments in
relationship-specific assets will fear that they may be held up and will tend to under-
invest. Consequently, various property rights and institutional arrangements, including
vertical integration, respond to mitigate the hold-up problem.
Another branch of transaction cost economics is more concerned with the diffi-
culty of measuring performance or attributes associated with goods or services, such as
in team production (Alchian and Demsetz, 1972; Barzel, 1982). My analysis relies more
on Williamson's framework than on others. However, most of my findings should be
independent of a particular theoretical framework because the hold-up problem and
vertical integration are all real-world phenomena.
Property rights and local governance in urban land use 137

What do the two spatial facts tell us?

The two spatial facts provide valuable clues for us to understand various phenomena in
urban property rights and land use. The first spatial fact, bundled consumption of land
and local collective goods, implies a contractual relationship between landowners and
collective goods provider. The second spatial fact, landowners' limited ex post mobility,
suggests the degree of asset specificity due to relationship-specific investments. Putting
them together, and presuming some uncertainty in contract enforcement, possible
asymmetric dependency can result in a hold-up problem. In other words, if uncertainty
creates a situation in which one side (either landowner or collective goods provider)
obtains more power at the contract execution stage, it can hold up the other side
simply because the latter's exit option is greatly reduced.
One issue unique to the hold-up problem in the provision of collective goods is that it is
a one-to-many relationship. Given the definition of collective goods, its one provider faces
many consumers or landowners. Hence, the negotiating power of landowners is weaker if
they cannot organize. This is an inherent organization problem for landowners if they want
to avoid being held up byöor even to hold upöthe collective goods provider. Generally,
there are two ways to overcome this organization problem. One way is to have only one
landowner and let all land users be free of relationship-specific investments, as in a
ground-lease system. The second way is to use some voting process, such as political
voting, corporate voting, or some hybrid form, to organize the various landowners and
make collective decisions. The latter way of organizing landowners is the essence of CIDs
and is also the focus of Fischel's ``homevoter hypothesis'' (2001).
Deng (2002a) analyzes how this hold-up problem in land use leads to different
outcomes in the retail and residential landscapes of North America. For the purpose
of this paper, I focus on how this analytical framework can be applied to different
combinations of land-use control and property rights.

Comparison of public and private zoning with private property rights

I regard zoning as a neighborhood collective good that can be provided either by
public institutions such as government or by private market institutions. I compare
five different combinations of property rights (of private goods, for example, land,
and/or improvements) and land-use control (a collective good) to highlight various
trade-offs involved in urban land-use. The five cases are private covenants, private
property and public zoning, private property and private zoning, public property and
public zoning, and public property and private zoning. All five arrangements can be
found either in various historical periods or in different countries. Given the impor-
tance of public zoning and private zoning with private property, most of my analysis is
concentrated on the comparison between these two cases.
Private property and public zoning
Private property under public zoning is probably the most common form of land-use
control throughout the world. Local government agencies are usually in charge of
zoning. Various technical and democratic mechanisms are designed to try to assure
that many voices are heard by the zoning board. In essence, it is a political process
with all of the advantages and disadvantages typical of political institutions.
The benefit view of public zoning
Based on the analytical framework, public zoning separates the provision of collective
goods from that of private goods (land and improvements). Land-use control is
provided via political institutions whereas land and property are transacted in the
market. One obvious benefit is that various costs imbedded in private contracts are
avoided, but the standard problems of political institutions are introduced.
138 F F Deng

The separation of the provision of land and collective goods works well only if the
collective goods provider's interest represents property owners' interests or if uncer-
tainty in the provision of collective goods is low. Both of these conditions are related
to the role of property owners in the political process, the heterogeneity of local
residents, the size of the city (which proxies how far removed local government is
from the property owners and the extent of special interest politics), as well as the
nature of government (especially in the case of nondemocratic countries). Fischel
(2001) used the term ``municipal corporation'' to describe US local governments
because homeowners cannot diversify away risks associated with home investment
and therefore have strong incentives to get involved in local politics. One form of
supporting evidence is that renters tend to be much less interested in local politics
(DiPasquale and Glaeser, 1999). However, this `homevoter hypothesis' may be more
applicable to suburban governments than central cities, which are often much bigger
and more heterogeneous. It is then not surprising that `flight from blight' is an
important explanation for US suburbanization (Mieszkowski and Mills, 1993).
Another perceived benefit of public zoning is its `flexibility' in imposing land-use
control ex post. For example, it may be relatively difficult to create market institutions,
which are based on voluntary contracts, in existing neighborhoods with fragmented
landownership. In contrast, public zoning can be easily imposed or changed as long as
voters can form a majority or if special interest politics is powerful enough. But, if the
composition of constituents is stable or being maintained (often via zoning itself ) as
stable, public zoning can become an effective tool for rigid control over land-use
change (Fischel, 1999). In the long term, this seeming ex post `flexibility' and conse-
quent rigidity of public zoning may be less desirable, as demonstrated by objections to
exclusionary zoning in the suburbs. What is more important is that this `flexibility'
brings costs, that is, uncertainty in land-use control. So, while seemingly `flexible' public
zoning can become rigid over time, it may also sow the seeds of its own alternatives.
Being created by and functioning through the political process, public zoning
should also be effective at finding a middle ground for diverging interests. This is
especially important to the modern welfare state, where equity concerns are at the
top of the political agenda. At the same time, all manner of stakeholders are now given
standing, often diluting private property rights.
NIMBY and regulatory takings
As cities grow into metropolitan areas and as urban populations become more hetero-
geneous, the political costs of land-use control grow. These include rent seeking by
special interests, transaction costs in political decisionmaking (such as NIMBY),
empowered technocrats and bureaucracy, and so on. Most important, these costs
denote increased uncertainty that results in hold-up problems between landowners
and collective goods providers.
The first manifestation of this hold-up problem in land use is regulatory takings.
Fischel (1995) offers a detailed study of this topic. When new regulations or zone changes
severely restrict property owner's land-use rights, it may amount to a `taking' as specified in
the Fifth Amendment of the US Constitution. Many recent rulings by the US Supreme
Court have affirmed the takings doctrine to check excesses of local governments. A simple
but often ignored question is: Why could not forward-looking landowners simply sell the
property, as shareholders sell their stocks, and move away from the problem? The two
spatial facts tell us that selling the property and moving away have significant costs. In
addition, unlike shareholders in the stock market, most homeowners cannot diversify their
risks because of the wealth constraint. Hence, landowners are held up by the government
in the regulatory takings case. This explains why Fischel (1995) calls for special legal
Property rights and local governance in urban land use 139

scrutiny to protect landowners, an admittedly complex area. He sees their situation as one
of attenuated exit and voice options.
The other side of the coin is NIMBY, when homeowners stage vigorous political
protests against undesirable public or private facilities locating in their neighborhood,
fearing that these may negatively affect their interests. This has become a common
occurrence in public hearings by zoning boards. Several authors have warned that
conventional zoning administration is ill suited to neighborhood transition.
Why is there NIMBY? There are probably two reasons. First, any change in the
provision of collective goods will put homeowners into a position of being held up by
government, as analyzed in the regulatory takings case even though the latter may be
more severe. Hence, they have every incentive to forestall government action ex ante.
Second, in the NIMBY case it is the collective goods provider that is held up by
homeowners, given that I do not distinguish the provider from the producer. The key is
the specific investment that the collective goods supplier has to make in order to
provide the collective goods. But it is more difficult for landowners to hold up the
collective goods provider because of their asymmetric one-to-many relationship. Let us
assume a firm or some private entity that is providing the collective goods. The firm
then needs to make site-specific investment (such as constructing special facilities) to
perform the contract. If some situation arises that gives the homeowners as a group
some opportunity to extract more benefits than the firm can agree to, then the firm is
being held up. Of course, it is not an easy process for so many homeowners to reach a
consensus. When government becomes the provider, it is even more difficult for them
to hold up government because of its legal coercive powers. This is why ex ante action
becomes more important for homeowners. In spite of this distortion due to the
political power of local governments, there are still cases where homeowners' NIMBY
action successfully shuts down undesirable facilities after they have been operating for
some time. In that case, the loss from a specific investment is spread over a larger
ambit while nearby homeowners' private costs are reduced.
Although NIMBY appears to be an issue of `my backyard' versus a larger area and
consequent divergence between social cost and private cost, its essence is the hold-up
problem that arises from uncertainty and relationship-specific investments. If home-
owners can easily move around without incurring significant cost, there will not be any
NIMBY. One piece of evidence is that renters seldom join NIMBY protests. Also, if
homeowners already know what is going to be set up in their `backyard' before they
purchase their home, they will be much less enthusiastic about NIMBY because future
events are already capitalized into the property price. Furthermore, if government or
collective goods producers do not need to make site-specific or relationship-specific
investments, the homeowners' voice will be more subdued in public hearings. So, the
best way to address the NIMBY problem is to attack its sourceöthe hold-up problem
in urban land use.
In summary, the separate provision of collective goods and real property gives rise
to possible efficiency losses because of the hold-up problem. NIMBY and regulatory
takings are two sides of the same coin.
Exit and voice
Political institutions are channels for people to voice their demand for collective goods
provision. But, if the costs of engaging in the political process become too high, exit
replaces voice (Hirschman, 1970). Nevertheless, given homeowners' reduced ex post
mobility, would they not be forced to rely more on political institutions (such as public
zoning) to voice their concerns?
140 F F Deng

Fischel (2001) provided a penetrating analysis of how this motivation may make
local government behave like a `municipal corporation' and zoning becomes a success-
ful example of local democracy. Nevertheless, it is still important to distinguish
between ex ante and ex post incentives. Yes, homeowners have to use a louder voice
in local politics given their stake in home investment; but, before they purchase a
home, they will prefer a place with less necessity for politics. In other words, their
ex ante interest in local politics is much lower than their ex post incentive. This ex ante
incentive motivates the evolution of market institutions.
In this sense, even exit cannot completely mitigate the uncertainty problem if there
is no real attractive alternative governance structure. Exit creates ex ante incentives for
new institutions. New property rights arrangements and market institutions gradually
evolve to alleviate the problem.
Private property and private zoning
Market resolutions are most likely to yield efficient outcomes, even within the con-
straints normally imposed by society (Hayek, 1988). Compared with the time when
public zoning first came about, modern cities are much bigger, more heterogeneous,
and more polycentric. Politics is no longer the province of property owners. Auto-
mobile transportation is well developed and people's physical mobility is greater than
ever. Various problems embedded in public zoning lead to the rise of private zoning.
Private zoning: empirical evidence
There are many studies of the bundled provision of private goods and collective goods.
Coase's (1974) study of 18th-century British lighthouses is a classic example. North and
Thomas (1971) analyzed the manorial system in medieval Western Europe in which the
lord provided safety and justice in exchange for a serf 's labor. More recently, studies of
company towns in coalfields show that the bundled provision of collective goods (like
a general store) and housing is largely driven by transaction cost factors (Fishback,
1992). These studies suggest that market provision of collective goods is feasible and
often efficient.
Empirical studies of private zoning are limited, probably because of the proprietary
nature of data. There is much less dispute on the function of shopping centers and
malls to provide collective goods, probably because of their clear-cut, commercial
property rights arrangements. Pashigian and Gould (1998) analyzed how shopping
centers internalize externalities among tenants and found that the rent paid by the
anchor store was 72% lower than that paid by nonanchor stores. Foldvary (1994)
studied Walt Disney World, which consists of both a retail community and transient
residential communities. He found that, as a large-scale equivalent to a city, it provides
civic goods in an efficient way.
Studies of CIDs are more complicated. Several writers have found that CIDs work
well (Dilger, 1992; Ellickson, 1998) and the CID phenomenon is not limited to the USA
(Barton and Silverman, 1994). Barzel and Sass (1990) analyzed the constitutional rules
of CIDs and the developer's role. Their findings suggest that developers, in a profit-
maximizing way, structure voting rules to minimize potential ex post governance costs
such as the majorities' attempt to capture wealth, the minorities' efforts as special
interests, and difficulties of decisionmaking on divisive issues. This is strong and direct
evidence for private zoning's efficiency in residential land use. Several case studies by
Foldvary (1994), including Fort Ellsworth and Reston in Virginia, note the success of
these private communities.
On the other hand, some authors (for example, McKenzie, 1994) are more negative
in their evaluation of CIDs. In spite of these criticisms, the fact that almost forty
million Americans have moved into these private communities in the last twenty-five
Property rights and local governance in urban land use 141

years is powerful evidence for the success of private zoning in residential land use. As
to the role of private zoning in new commercial land use, it is almost taken for granted.
Why private zoning?
The first reason for the rise of private zoning is the uncertainty embedded in the
political process in addition to more ubiquitous externalities among adjacent land
uses. Modern political economy has devoted substantial attention to special interest
politics (Buchanan et al, 1980), especially in large cities and at higher levels of govern-
ment. Although special interest politics can go both ways in the sense that it can both
benefit and harm landowners, the invariable result is increased uncertainty. Even if
majority rule prevails, which is probably true in small suburban cities, population change
may still leave enough room for opportunistic behavior by the political majority. Land-
owners of undeveloped land and the potential future residents they represent may still be
stripped of development rights after new residents eventually outnumber the original
rural residents who are more pro-development (Fischel, 1999).
When uncertainty exists with asset specificity in the (quasi-)contractual relationship
between landowner and collective goods provider, opportunistic behavior will cause
efficiency loss, as demonstrated by NIMBY and regulatory takings. Public zoning has
been unable to resolve either hold-up problem as evidenced by the large-scale of exit in
recent decades to private communities.
Transaction cost economics shows that it is efficient for the parties to a contractual
relationship to be integrated when they have to make relationship-specific investments. In
urban land use, this suggests that it is efficient for property owners and collective goods
providers to be integrated when a potential hold-up problem exists. Interestingly, George's
(1879) argument that government collect land rents to pay for public services also
represents a kind of integration. This is based on George's insight on the capitalization
of public services into rent. In the context of the hold-up problem, rent capitalization is
not necessary although it further strengthens the case for integration.
Because a collective goods provider cannot be a land user by definition, the
integration of property owner and collective goods provider leaves available at least
two basic options for the relationship between property owner and user. The first
choice is leasehold, in which the users lease the property from the owner (Deng,
2002a; MacCallum, 1997). The second choice is for the property owners to form an
organization (like a CID) that is responsible for providing and managing collective
goods. In the latter case, fee simple ownership of land can be kept and property owner
and user are still integrated, if in another form.
In residential real estate, the CID phenomenon demonstrates the popularity of the
second type of integration. Developers of residential properties have found that not
only is it in their interest to discover the optimal mix of physical characteristics of
residential developments but they also have the opportunity to discover, articulate, and
deliver optimal rules of governance (Boudreaux and Holcombe, 2002). In other words,
it is market competition that drives developers to bundle the provision (and discover
optimal bundles) of collective goods and private goods.
In retail real estate, the rapid growth of shopping centers and malls are examples of
the first type of integration, that is, the ground-lease system. Without any equity
investment in land and improvements, tenants are footloose and can vote with their
feet for the desired bundle of private and collective goods. Markets determine the
provision of collective goods.
The last, and probably most important, reason for private zoning is Hayek's (1945)
elaboration of how markets organize decentralized knowledge. In addition to public
spaces and facilities, one important collective good provided by CIDs involves the
142 F F Deng

rules regarding residents' behavior, possible neighborhood externalities, and even

design features such as color of building and where to display flags. This is not covered
by most conventional zoning boards. It is also an impossible task for a conventional
zoning board or urban planning agency because neighborhood externalities are so
decentralized and so dependent on people's diverse preferences. As Hayek's insight
suggests, only decentralized market institutions organizing decentralized knowledge
can efficiently respond to these problems.
What is different from public zoning?
The first distinguishing feature of private zoning is that it is initiated and often managed
by one single owneröthe developer who is the land-use entrepreneur. In the case of the
ground-lease system, the single landowner or lessor is responsible for everything, from
design to construction to management. Even in CIDs, the development and the design
of their constitutions are also carried out by the developer. Although lots of attention is
paid to CID's ex post governance structure, the pre-HOA (homeowners' association)
stage is vital to the development's eventual success. Barzel and Sass (1990) offer
compelling evidence for the important role of developers in private zoning.
This leads to the second difference between private and public zoning. The impor-
tant disciplining force for private zoning is the market. If developers cannot meet
market demands and ignore consumer preferences, they will incur losses and even-
tually be forced out of business. If managers of the private community fail to do their
job, they will be replaced by other managers. For public zoning, there is no equivalent
disciplinary force. Besides, private zoning is based on voluntary contracts that are
enforceable by the courts. If HOA officials fail to implement properly the CC&Rs
(covenants, conditions, and restrictions), they can be sued by the residents. The power
of political `contract' in public zoning is much weaker.
Even in areas of similarity between private zoning and public zoning, namely the
ex post governance structure in CIDs, there are also significant differences between
them, let alone in the case of leasehold-based private zoning. CID's voting rights are
only available to property owners no matter whether based on square footage, unit,
or value. This is closer to corporate voting than to political one-person-one-vote.
Property-based voting not only realizes the integration of landowner and collective
goods provider, but it also resolves the difference between mean and median voter
(Holcombe, 1989). There is usually a supermajority voting rule for any change
in CC&Rs, to restrain any majoritarian impulses to change the rules of the game. In
contrast, public zoning involves not only landowners but also many other stake-
holders. Especially in large heterogeneous cities, public zoning may be more easily
captured by special interest groups.
CID's voting rules are likely to be optimized by developers in market competition,
providing bundled physical property and associated rules of governance. CC&Rs also
include rules for assessments, linking local finance to decisionmaking. Barzel and Sass
(1990) found that voting weights tend to be allocated similar to special assessments even
though the probability of selecting uniform voting (a low-cost system) increases with the
total number of units. In this way, distortions due to property tax in the Tiebout model
(Hamilton, 1976) are reduced. More important, they found that developers tend to
undertake projects in advance that have greater potential for divisiveness. The inclusive-
ness of voting rules selected increases with the heterogeneity of the voting group and the
degree to which benefits are nonpecuniary. These optimization-oriented features of CIDs
lower ex post governance costs and reflect the market's ability to exploit decentralized
knowledge. The rigid structure of public zoning and consequent political costs (like
NIMBY) are in sharp contrast to private zoning.
Property rights and local governance in urban land use 143

Finally, private zoning offers flexibility in land-use change. It is clear that in the
ground-lease system, leasehold gives the single landowner maximum flexibility for any
major change in land use. Although CID rules do not contemplate major changes in
land use, the development process demonstrates flexibility that contrasts with public
zoning. Usually a single developer quietly assembles the land parcels. In the case of
Walt Disney's World, the Disney group bought much more land than currently devel-
oped or held for conservation in order to create a buffer zone (Foldvary, 1994). Because
the development is usually phased in over many years, the developer is careful to retain
a majority of votes even after setting up an HOA for early buyers. In this way, the
development plan would not be changed or thwarted by early residents. As Fischel
(1999) pointed out, the change of local political climate after new residents become a
majority in the suburbs is the main reason for exclusionary (public) zoning and
consequent social problems like NIMBY. This type of political opportunistic behavior
recedes in the process of private zoning by flexibly using different forms of property
rights and governance structure at different stages.
For all these reasons, regulatory takings and NIMBY are almost absent within
private zoning, while they remain thorny issues in public zoning. Both ground-lease
system and CIDs have zoning (or the control over collective goods) revert back to
landowners, although in different forms for different types of real estate (Deng, 2002a).
Hirschman (1970) famously elaborated the choice that consumers have between exit
and voice. Now homeownership when packaged as a CID includes an exit option; this
time exit from traditional forms of local government (Gordon and Richardson, 2001).
The same is true for shopping centers and malls.

Other combinations of property rights and land-use control

Private covenants
Before the introduction of public zoning, private covenants were the major mode of
land-use control (Beito, 2002; Davies, 2002; Siegan, 1972). There are two questions
related to private covenants. First, why were private covenants successful before the
20th century? Second, what explains the rise of public zoning and the subsequent
demise of private covenants in the first half of the 20th century?
At a time when land-use controls were mostly in the form of private covenants,
cities were relatively small and neighborhoods relatively homogeneous. Ground trans-
portation was less developed and people's mobility was, by today's standards, quite
limited. Most people were more concerned about food and shelter than about collec-
tive goods. For upper income residents who might be more interested in neighborhood
quality, private covenants became a natural tool because of (1) the limited number of
concerned parties, which significantly reduced possible costs of negotiation and liti-
gation, and (2) people's relative immobility lowered the level of uncertainty in land use.
In addition, cities were usually of the monocentric type and low-density development
was not widespread. Land was therefore relatively more concentrated and was often
owned by big landowners. As Davies (2002) has documented, many private deed
restrictions in England were imposed by the original big landowners, usually nobility
and other landed gentry.
Nevertheless, the rise of public zoning in the early 20th century has been seen by
many as demonstrating the inadequacy of private covenants in land-use control. Even
some writers less begrudging of private property have noted problems that go with
private covenants (see, for example, Beito, 2002; MacCallum, 1970). For example,
enforcement of private covenants is through litigation that is costly. It is also more
difficult to negotiate, create, and enforce private covenants when many parties
are involved, especially with fragmented landownership in existing neighborhoods.
144 F F Deng

These situations usually occur when people become more mobile and landownership
becomes more fragmented.
What lessons, then, can we draw from the experience with private covenants? First,
the efficacy of private covenants as the only mode of land-use control relies on various
preconditions, including relatively homogeneous residents, low mobility, and relatively
concentrated landownership. Second, and more fundamentally, the demise of private
covenants reveals that comprehensive contracts are impossible and contract enforce-
ment is costly. If all decisions about collective goods can be made ex ante via contracts
and can be enforced ex post by the courts, then no land-use control is necessary. But,
only a stagnant city would approximate these conditions; the vibrancy of modern cities
undermines contracting. Third, for the provision of collective goods bundled with land,
multilateral contracting is difficult and costly. This is especially true for existing
Public property and public zoning
Given the merits of integrating property owner and collective goods provider, as
discussed in the case of private zoning, some may wonder why these two roles should
not be integrated via a public institution. This means combining public property and
public zoning. An extreme example is the former socialist cities, where no private
property exists and everything is planned by government agencies. For my purpose
here, I focus on examples that may be more realistic in a market economy. These
include public land leasing, such as in Hong Kong and China, and some community
land trusts. In this type of land-use control, the landowner is a public institution that
provides collective goods and land users can only lease the land.
From an efficiency perspective, public property with public zoning suffers from
several problems. The first is that public ownership of land will greatly reduce the
incentives of private individuals while increasing the insecurity of private property
rights. This suggests the dangers of Leviathan (Brennan and Buchanan, 1980) or a
predatory state (Lal, 1998). This concern is valid in a democratic society, not just in
a transitional economy or an autocratic state. Even if we assume away governmental
usurping of private property rights, bureaucracy and the rent-seeking nature of the
political process inevitably raise contracting costs with government. This is why in
many successful examples of public land leasing, such as Hong Kong and Canberra,
public landownership has gradually been diluted and become more akin to fee simple
ownership (Neutze, 2002).
The second problem has to do with the costs of integration in the context of public
institutions. In the case of private property and private zoning, I argue that it is efficient
to integrate property owner and collective goods provider. But, with public property and
public zoning, can the benefits of integration still remain? Do public institutions cause
problems for such integration?
To some extent, the benefits from integration still hold. This is why public land
leasing is usually seen as facilitating the implementation of land-use control (Yeh,
1994). But, more importantly, public landownership gives rise to unique problems.
For firms, the integration of various roles can be synchronized by a single objective
function, profit maximization. For public institutions, what distinguishes them from
firms is their multiple objectives. The merit of a political process lies in the ability to
accommodate different interests and compromise between different objectives. How-
ever, from an efficiency perspective, the multipurpose nature of public institutions can
cause conflicts when different roles are integrated. Costs of integration may be much
higher because these different roles cannot easily be synchronized even though they
can be compromised. Even careful institutional design, like setting up different
Property rights and local governance in urban land use 145

independent divisions, cannot completely eliminate the problem. I found (Deng, 2002b)
that public land leasing in China suffers from these sorts of role conflicts. A typical
example is local government's land subsidy to state-owned enterprises, a powerful
special interest group.
Third, government is more or less a hierarchical structure. Monopoly is always a
problem in the case of public property and public zoning. Without market competition,
the efficiency properties of public property and public zoning are greatly reduced.
There are other problems with public property and public zoning. One example is
politicization and rent seeking. Although some may argue that economic systems
and political systems can conceivably be separate (Lal, 1998), this is debatable. Studies
(Deng, 2002b; Li, 1997; Zhu, 1999) on China's public land leasing system, which is
substantially affected by politics, confirm this problem.
Nevertheless, there may be some merits to a system of public property and public
zoning. For example, in Hong Kong, public land leasing is a major revenue source for
public finance (Hong, 1998). But, generally, public property and public zoning is
problematic. The trend appears to indicate that it becomes gradually diluted and moves
toward private property or private zoning.
Public land and private zoning
Public land and private zoning may sound like an implausible combination. But it
exists in the real world, such as in China and Hong Kong. In China, since the urban
land reforms of the late 1980s, many CID-like developments have emerged and HOAs
have been formed to take control of common property management and collective
goods provision. Because all urban land in China is owned by the state, this type of
land use can be called private zoning on public land.
The essence of this combination is that private zoning develops out of the much-
diluted public landownership, demonstrating the power of markets. For my purpose
here, I am interested in the hierarchical structure of this type. If public landownership
is justified by the demand for collective goods provision, then its coexistence with
private zoning indicates different levels of collective goods. In my previous analysis, I
assume the same efficient spatial scale for collective goods. But, if their efficient spatial
scales are different, then a hierarchical institutional structure may become necessary.
The growth of private zoning on both private and public land suggests that many local
collective goods can be efficiently provided in the market, even though a political
system may be necessary to provide some other collective goods at larger scales.

Is private zoning an antidote to NIMBY ?
NIMBY is a complex phenomenon. Some treat it as a plague, characterized by self-
interested or even irrational homeowners (Beckmann, 1973; Inhaber, 1998); others
regard it more as a democratic strategy against technocrats or overbearing govern-
ments (Gerrard, 1994; McAvoy, 1999). Based on my discussion of urban land-use
control, NIMBY is essentially a hold-up problem between homeowners and govern-
ment in traditional public zoning. This is the direct opposite of regulatory takings,
where government holds up the property owner. Conventional zoning solutions (such
as compensation in the form of fees and exactions) cannot resolve NIMBY. It is the
homeowners' response to uncertainties and risks beyond their control in collective
goods provision.
My analytical framework suggests that private zoning is an institutional response to
the hold-up problem in urban land use. Because private zoning takes third-party zoning
boards out of the loop and relieves agency problems, is it an antidote to NIMBY?
146 F F Deng

There have been several proposed remedies for NIMBY, most of them theoretical.
The first approach tries to reduce the homeowners' stake. Shiller (1993) advocates an
insurance market for property values based on property price indices. Caplin et al
(1997) propose housing partnerships to relieve homeowners' equity position. These
methods are not practical. They do not pay enough attention to collective goods
bundled with private property even though they more or less implicitly try to capture
that impact. Another avenue of resolution involves resort to the courts (Fischel, 1995;
1999). This introduces litigation costs that might be a problem.
Other approaches run the gamut from Nelson's privatization of neighborhoods
(1999) all the way to proposals for regional government (Downs, 1994; Rusk, 1999).
Although these suggestions are polar opposites, they both focus on governance struc-
tures. From an efficiency perspective, regional government is problematic. Although
the essence of NIMBY is homeowners versus collective goods provider, it sometimes
appears as a conflict between local government and regional concerns. This is because
of Fischel's (2001) `homevoter hypothesis'ölocal government successfully and demo-
cratically represents homeowners. So, by consolidating local governments (and their
land-use decisions) into a regional government, the link between government and
homeowners is weakened. In other words, the assumption on which the idea of
regional government is based (that is, local governments that successfully represent
`homevoters') is undermined. Conflicts between local governments diminish but for the
reason that they now represent homevoters less on property issues. Homeowners'
concerns are still there. Under a regional government, individual homeowners may
face more uncertainty from a more remote government and the asymmetric relation-
ship between homeowner and government will be amplified. By only dealing with how
to provide collective goods, the regional government proposal misses the central issue
of the NIMBY syndrome: homeowner's equity investment in housing and uncertainty
in the provision of collective goods.
Taking an opposite tack, Nelson (1999) advocates privatizing existing neighbor-
hoods into neighborhood associations through supermajority voting by property
owners. This would introduce private zoning into older established neighborhoods.
However, given our second spatial fact, homeowners may not have as many choices
as expected if they do not like the results of supermajority voting (either for or against
neighborhood associations). Hence, efficiency may be compromised depending on the
extent of consensus among homeowners. This is the difference between CIDs, as
formed in the market and provided ex ante to homeowners, and Nelson's proposal
that basically sets up private zoning ex post.
Reviewing these four approaches to NIMBY shows that collective goods provision
and home equity investment are two sides of the NIMBY coin. In contrast, private
zoning addresses both issues simultaneously. In a ground-lease system, the landowner
controls the provision of collective goods and land users are relieved of the burden of
equity investment. This is confirmed by the usual absence of landlords and tenants
from NIMBY conflicts. Even for CIDs, in which land users still have equity invest-
ments, governance rules that are designed and provided ex ante by developers in
market competition optimize ex post governance (Barzel and Sass, 1990). So, by
relieving the agency problem in land use, private zoning largely avoids or resolves
the NIMBY problem, at least at the local level.
One important cause of NIMBY is the political dynamics arising from existing
residents' opportunistic behavior (Fischel, 1999). In contrast, the process of private
zoning uses various forms of property rights and governance structure to resolve
potential problems at different stages. First, a single landowner quietly assembles
land, avoiding the public choice problem of existing fragmented landownership.
Property rights and local governance in urban land use 147

In a phased-out development process, the developer retains a significant portion of

votes, preempting potential opportunistic behavior from early residents. Because
the voting rules and even the construction of physical projects are designed (via market
competition) to minimize possible agency costs, problems in the decisionmaking pro-
cess of the HOA are much smaller than in the case of a conventional zoning board.
This process of private zoning demonstrates the adaptability and flexibility of market
Most important of all, private zoning creates a market for local governance. This is
the driving force behind all merits of private zoning.
Some equity issues
There are usually concerns about equity issues related to private zoning. Compared
with many existing problems associated with public zoning, private zoning does not
necessarily result in greater inequity. In fact, it addresses several important equity
issues associated with public zoning.
The central feature of private zoning, the integration of landowner and collective
goods provider, resolves two equity problems of the separate provision of land and
collective goods in traditional public zoning. On the one hand, zoning decisions may
negatively affect landowners' interests and result in the takings case; on the other hand,
they may have positive impacts on land value, generating windfall profits to land-
owners. The latter was the motivation behind George's proposal of a single tax. In
private zoning, the capitalization of local collective goods is reaped by the landowner
who is responsible for providing those goods. In this sense, it is fairer as well as more
NIMBY has generated serious equity problems. As discussed in previous sections,
the whole process of private zoning, especially in the ground-lease system, can effec-
tively restrict opportunistic behavior by existing residents. This could increase urban
density and promote more mixed uses. As long as developers stick to the profit-
maximization objective, positive externalities from more heterogeneous land uses or
users will make private zoning more inclusive and heterogeneous. One example is
shopping centers and malls, where developers intentionally mix many different stores
and appeal to a broad market. In this sense, the `color of money' (Garreau, 1988) can
yield results that are fairer than voting.
Acknowledgements. I am indebted to Professor Peter Gordon for his guidance, valuable comments,
and editorial help on various versions of the paper. His imprint is evident. An early version of this
paper, coauthored with Peter Gordon, was included in the Working Papers of Lusk Center for Real
Estate at University of Southern California, which provided research funding for us. Helpful
comments from three anonymous referees are gratefully acknowledged.
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