Profit maximizing developers and the optimal provision of local public good in a closed system of a few cities - article ; n°1 ; vol.36, pg 45-62

David Pines

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Revue économique - Année 1985 - Volume 36 - Numéro 1 - Pages 45-62
Un changement de la valeur de la terre associé à un projet d'investissement peut donner, selon la littérature existante à ce sujet, une estimation faussée du vrai bénéfice social qui est une source potentielle de l'échec du marché (market failure). Cet article est consacré à l'analyse systématique de la direction de la déviation (biais). Deux conditions suffisantes de rechange sont proposées afin que le bénéfice social dépasse l'augmentation de la valeur de la terre. L'une est déterminée par l'absence des propriétaires et l'autre par la constance de l'utilité marginale du revenu. Cependant, il est démontré, à l'aide d'un exemple, que le bénéfice social ne doit pas toujours dépasser l'augmentation de la valeur de la terre. Il est démontré que, pour une zone urbanisée se composant de villes iden­tiques, la direction de la déviation (biais) ne dépend pas du nombre de villes, en accord avec la littérature existante, la déviation (biais) disparaît à mesure que le nombre de villes identiques tend à l'infini.
Profit maximizing developers and the optimal provision of local public good in a closed system of a few cities
David Pines
Accordins, to the existing literatnre a change in land value associated with an investment project may be a biased estimate of the true social benefit, and is a potential source for market failure. This paper extends the above finding by systematically analzying the direction of the bias. Two alternative sufficient conditions are provided for the social benefit to exceed the increase in land value. One is when landlords are absentes, and. the other is when the marginal. utility of income is constant. However, it is shown, by using an example, that this benefit need not always exceed thc increase in land value. For an urbanized area consisting of identical cities, it is shown that the direction of the bias is independent of the number of the cities, but, consistentlywith existing literature, the bias vanishes as the number of the identical cities tends to infinitif.
18 pages
Source : Persée ; Ministère de la jeunesse, de l’éducation nationale et de la recherche, Direction de l’enseignement supérieur, Sous-direction des bibliothèques et de la documentation.

Sujets

• Sociologie, société et politique

Informations

• Publié par: REVUE_ECONOMIQUE
• Publié le: 01 janvier 1985
• Nombre de lectures: 8
• Langue: English

Extrait

Monsieur David Pines
Profit maximizing developers and the optimal provision of local
public good in a closed system of a few cities
In: Revue économique. Volume 36, n°1, 1985. pp. 45-62.
Citer ce document / Cite this document :
Pines David. Profit maximizing developers and the optimal provision of local public good in a closed system of a few cities. In:
Revue économique. Volume 36, n°1, 1985. pp. 45-62.
http://www.persee.fr/web/revues/home/prescript/article/reco_0035-2764_1985_num_36_1_408833Résumé
Un changement de la valeur de la terre associé à un projet d'investissement peut donner, selon la
littérature existante à ce sujet, une estimation faussée du vrai bénéfice social qui est une source
potentielle de l'échec du marché (market failure). Cet article est consacré à l'analyse systématique de la
direction de la déviation (biais). Deux conditions suffisantes de rechange sont proposées afin que le
bénéfice social dépasse l'augmentation de la valeur de la terre. L'une est déterminée par l'absence des
propriétaires et l'autre par la constance de l'utilité marginale du revenu. Cependant, il est démontré, à
l'aide d'un exemple, que le bénéfice social ne doit pas toujours dépasser l'augmentation de la valeur de
la terre. Il est démontré que, pour une zone urbanisée se composant de villes iden-tiques, la direction
de la déviation (biais) ne dépend pas du nombre de villes, en accord avec la littérature existante, la
déviation (biais) disparaît à mesure que le de villes identiques tend à l'infini.
Abstract
Profit maximizing developers and the optimal provision of local public good in a closed system of a
few cities
David Pines
Accordins, to the existing literatnre a change in land value associated with an investment project may be
a biased estimate of the true social benefit, and is a potential source for market failure. This paper
extends the above finding by systematically analzying the direction of the bias. Two alternative sufficient
conditions are provided for the social benefit to exceed the increase in land value. One is when
landlords are absentes, and. the other is when the marginal. utility of income is constant. However, it is
shown, by using an example, that this benefit need not always exceed thc increase in land value. For an
urbanized area consisting of identical cities, it is shown that the direction of the bias is independent of
the number of the cities, but, consistentlywith existing literature, the bias vanishes as the number of the
identical cities tends to infinitif.PROFIT MAXIMIZING DEVELOPERS
AND THE OPTIMAL PROVISION
OF LOCAL PUBLIC GOOD
IN A CLOSED SYSTEM OF A FEW CITIES *
INTRODUCTION
We know that the benefit of a land improvement propect is perfectly
capitalized if it directly affects only a small part of the population (see,
for example, Polinsky and Shavell [1976], Pines and Weiss [1976],
Helpman and Pines [1977], and Starrett [1981]). Therefore, in a system
of many open cities (with free migration) the market provides the
warranted signal for socially desirable projects to a profit maximizing
developer (see, for example, Sonstelie and Portney [1978] and Brueckner
[1983]).
The full capitalization result is not valid, of course, if the size of
the population directly affected by the improvement project is not
negligible relative to the total population. More specifically, it is shown
in the literature, that the increase in land value in the area directly
affected by the improvement project is not equal to the social benefit
(see, for example Strotz [1968], Polinsky and Shavell [1976], Pines
and Weiss [1976], and Starrett [1981]). Thus, the market fails in this
case to provide the warranted signal (from a social point of view) to a
profit maximizing developer.
The importance of the capitalization issue cannot be exaggerated.
The policy implication of less than full copitalization is, for example,
* This research was supported by funds granted to the Foerder Institute for
Economic Research by the Nur Moshe Fund. I am indebted to E. Berglas, E. Sadka,
and Y. Weiss of Tel-Aviv University and J. Brueckner of the University of Illinois
at Champaign-Urbana for helpful comments and suggestions. The remaining errors
are mine only.
45
Revue économique — N° 1, janvier 1985 Revue économique
that development towns are inefficient as long as their size is not
negligible. Furthermore, the implication of less than full capitalization
is that financial failure of neignborhood rehabilitation project may be
a biased indication of its economic undesirability. Or, to put it diffe
rently, the fact that developers do not try to internalize the neigh
borhood effects by assembling land to be developed, is not necessarily
an indication that the neighborhood effects are not important factors
in the deterioration process of the central parts of many cities (See Mills
[1972]).
The purpose of this paper is to elaborate further on this kind of
market failure, to analyze the interrelationship between the capitali
zation and the social benefit, and to investigate in what direction the
change in land value, as an estimate of social benefit, is biased. Such
an elaboration is necessary since the existing literature either suffers
from restrictive assumptions or is less concerned with the specific
issues outlined above. For example, both Strotz [1968] and Starrett
[1981] restrict their discussion to constant marginal utility of income.
Polinsky and Shavell discuss only a semi-open system of cities, in the
sense that the developers are absentee and therefore resources leak
out of the system to outsiders. In their case the direction of the bias
can easily be determined. As will be shown, the main difficult)' in
evaluating the direction of the bias is in the case where resources do
not leak out, i.e. the profits of land improvement are redistributed
to the local population. Pines and Weiss [1976] are mainly concerned
with using the total change in land value as an estimate of the benefit.
The question of the bias in using the change in land value in the area
directly affected by the improvement, as a signal to developers, is only
heuristically pursued in their paper.
In this paper we provide sufficient conditions for less than full
capitalization. It is shown that in the case of absentee landlords, i,e,
the case discussed by Polinsky and Shavell, and in the case where
the marginal utility of income is constant, i.e., the case discussed by
Strotz and by Starrett, the land improvement projet is less than fully
capitalized. In the more common cases where housing is normal and
land is at least partially owned by the population of the urbanized
area, the bias can be either positive or negative, depending on the
specification of the problem.
When the urbanized area is comprised of identical cities it is shown
in this paper that the direction of the bias is independent of the number
of the identical cities, although the magnitude of the bias declines with
this number. The above result is in some sense surprising since a priori
46 Pines David
one expects less than full capitalization, as the developer exerts in the
case of a few cities, a monopolistic power.
The plan of the paper is the following : In Section 2 we present
the model, define land improvement projects, and calculate the social
benefit. Section 3 is devoted to special cases of our model and sufficient
conditions for less than a full capitalization are suggested. In Section
4 we discuss the case of identical cities with full local ownership
of land. Summary and concluding comments are the subject of Section 5.
THE MODEL
Consider an urbanized area comprised of m + 1 monocentric cities.
This urbanized area is inhabited by N homogeneous households, in
terms of both income and preferences. Requiring a priori equal income
implies that each household owns equal share, k'/N (0 ^ k* ^ 1), in
every piece of land of city i, no matter where its location, where 1 — k1
is owned by absentee landlords. Otherwise the distribution of income
is affected by the equilibrium rent profiles.
The homogeneous households can relocate costlessly between and
within the m + 1 cities. This implies that in equilibrium the realized
utility u, must be equal across locations. In each location, this utility
depends on the consumption of a composite good, Z, with a unitary
price and housing, H, with price R; (x) (i = 1, ..., m + 1), which depends
on the distance from the centre of the respective city, x. El (R' (x), u, y')
is the expenditure function of a household in city i, where y *s
a shift parameter indicating the level of the local public good and
E'r = 3 E'/3 Y < 0. Households spend V (x, a1) on transport, where a1
is a shift parameter such that t\ = 3 f ( )/3 cC < 0, and
Vx = 3 f ( )/3 x >• 0. Each household is endowed with I units of
the composite good and fc'/N of the land in each location of city i.
Accordingly, the budget constraints of a house