The objective of this chapter is to present an analytical model for research on the influence of the property rights regime on the land development process, which is based on the thoughts underlying the property rights theory and initial empirical investigations of property rights regimes. This is done in order to contribute to the further conceptualisation of the impact of institutions on land development process. The analytical model allows discussing the role of the property rights regime in land development and it will be used in comparison between countries concerned in the research. This chapter starts with a summary of the perspective that has been chosen in the present study.
5.1 How land development is viewed in this research
The power of any theory is exactly proportional to the diversity of situations it can explain.
Therefore, all theories have limits. Scientific knowledge is as much an understanding of the diversity of situations for which a theory or its models are relevant as an understanding of its limits (Ostrom, 1990, p.24). The institutional theory and institutional economics theory does not build the complete picture of our complex word. Some authors (for example Jütting 2003 p. 33) emphasise that not only institutions influence the development outcome. There are other variables like the local setting influenced by historical trajectories, culture and the behaviour of human actors. Consequently, the behavioural and socio-cultural variables should also be taken into consideration.73
In the previous chapters I have presented the complicated nature of institutional and institutional-economic analysis of the built environment. As it was explained in Chapter Three, there are different definitions and also delimitations of institutions. Any method for undertaking the analysis of institutions should take into consideration the existence of different levels of institutions. This enables a researcher to choose the most relevant level of interaction for a particular question.
In order to summarise how land development is viewed in this research, I will present the institutional model of land development process (Figure 5.). The comprehensive conceptual model of an institutional explanation of property development was presented, for example, by D’Arcy & Keogh (2002, p.23) The authors deal with broad institutional issues at three levels:
the institutional environment, the property market as institution and property market organisations. The institutional environment is understood as an institutional framework within which the property market exists. It is defined by the political, social, economic and legal rules and conventions by which the society in question is organised. The property market as an institution is a network of rules, conventions and relationships that collectively represent the system through which property is used and traded. Finally, the third level relates to the main organisations that operate in the property market, the way they are structured and
73 These factors can be distinguished from the institutions. Assumptions concerning human behaviour are preconditions for an institutional approach. However, it is also emphasized by other authors that it is impossible to delineate precise boundaries between behavioural, socio-cultural, and institutional factors (see for example Kauko, 2002, p.35).
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the way they change. There is, of course, interactive relation between different levels of institutional analysis. The extension of this model and insights from approach of van der Krabben (1995) formed my perspective to conceptual institutional explanation of land development (Figure. 5).
Figure 5. The institutional settings of land and property markets. Based on: D’Arcy & Keogh (2002, p.23) and Van der Krabben 1995
In my research, in general, I will pay attention to the property market as institution. I will try to identify the characteristics of that market as an institution in the process of land development. However, I will concentrate on one selected aspects of institutional analysis, which refers to the formal rules of the property rights regime. I will look at the network of rules within the property rights regime and their relationships with the process of land development. Therefore, in particular, I will look at the property rights regime as an institution.
The informal relations, like norms, expectations, trust, emotions, moral values, habits, non-contractual arrangements are not the starting point and initial focus of this study. However, I will keep focused on how rules are implemented in practice. In addition there are different economic variables which could be added to an analysis. I will try to exclude from the analysis several factors. For the purpose of this research variables such as, e.g., the nature of supply and demand, the rationalities behind the strategies of market participants (therefore the factors related to the rationality of human agents), as well as knowledge (information) and uncertainty problems, are fixed as independent variables. I consider these relations are
The nature of supply and demand, information and uncertainty. Market aspects
Rationalities behind the strategies of market participants Historical trajectories, culture
The institutional environment
• political institutions
• social institutions
• economic institutions
• legal institutions
The property market as institution
• Property rights regime
o legal and conventional aspects of property rights o legal and conventional aspects of land use and
development
Property market organisations
• actors
• suppliers and demanders
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significant explanatory variables, as convincingly presented by Van der Krabben (1995).
However, I assume that these variables are fixed for the purpose of the analysis made on the selected aspect of property rights regimes. In the present research I will try to discuss the property rights regime in relation to land development. A deeper analysis on one selected level can give valuable insights into further theorizing on the relationships between different levels of institutional analysis.
The ‘old’ institutional approach does not really provide the explanatory power. The assumptions of institutional theory in comparison to neo-classical economics are much more rational, but ‘what’ and ‘how’ drives the choices influenced by the institutions become unresolved. The institutions matter, but still there is no commonly approved alternative for neoclassical theory of price mechanism. The theoretical insights from new institutional economics theory is that in a world of positive transaction costs a comparative assessment of different modes of organizing economic activities is needed because governance structures and legal rules matter for efficiency outcomes according to property rights theory and transaction costs theory (Coase 1937, 1960). The new institutional economics theory assumes, e.g. that human agents act boundedly rational, information problems are characteristic to human behaviour and uncertainty is structural to economic activity. In new institutional economics, given certain preferences, the choice of the governance model will depend on the transaction costs. However, the new institutional economics theory is not the unified body of a research. Emphasis on transaction costs are not followed by all significant contributions to the property rights theory (e.g., Libecap). There is also no general theory of land markets which could be derived from new institutional economics. In addition, actors in the new institutional economics are still not human beings, because they act as rational machines maximising utility within bounds. Therefore, in the present research only some concepts of institutional and institutional-economic approaches will be used, such as institutions, property rights regimes, partitioning, delineation and allocation of property rights. In the present research the transaction costs theory is not applied to land development, neither as a theory nor as an analytical tool (for the application of transaction costs theory to land development see Buitelaar, 2007).
In the previous chapters, I have made clear that the influence of the property rights regime on land development in terms of the property rights theory will receive the most attention in this study. There are several arguments why I have developed my study in the direction of the property rights theory. The new institutional economics theory and, in particular, the property rights theory have directed the discussions of institutions towards the property rights regime.
Property rights constitute the typical example of an institution. It is assumed in this thesis that the property rights approach generates a better understanding of the allocation of resources.
The property rights theory indicates that property rights are important instrumental variables (e.g. Bromley, 1991, p.5). There is no consensus if the degree to which ownership is established over a commodity’s separate attributes depends on the cost of creating and policing contracts that establish that ownership – that is, transaction costs74 - or a political power (Libecap, 1989) or the process of social creation (Needham, 2006) and/or path dependency (North, 1990). However, the property rights theory gives a clear point that there can be many different rights attached to one piece of land and distribution of these rights matter for efficiency outcomes. A resource can also be partitioned among several parties and
74 Because e.g. higher transaction costs does not always imply that the property rights will be not assigned
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in such a way that those partitions of rights can be aggregated into bundles of property rights (Alchian, 1965; Alchian and Demsetz, 1973). Therefore rights in land can include more than the right of ownership. There is also more than two types of property rights namely: private and public.
According to the property rights theory, the initial allocation of property rights affects what happens with respect to externalities. In real life, transaction costs can never be neglected (Coase, 1960), and therefore the outcome of the negotiations between the interested parties, in the sense of the final allocation of resources, will depend on the property rights distribution.
It is the reason why distribution of rights and liabilities within the property rights regime, within which the land development process is taking place, will receive the most attention in this study.
The empirical analysis in Chapter Four demonstrated the significant differences in the distribution of rights and liabilities in the legal framework within which land development process is taking place. In studies which apply the property rights theory to planning and development, it is noticed that the delineation and allocation of rights and liabilities find expression in the outcome of the land and property development process. The nature of, for instance, legal rights, planning rights and other interests in land affects the land use. For example, Needham (2006, p.9) argues: “if the owner of land has a presumptive right to emit pollution, then uses sensitive to pollution will not locate nearby.”, “In Britain, leasehold right may be traded, in the Netherlands not. One result is that business users take a long lease in Britain, if their need for space changes, they can assign the lease to someone else. Business users in the Netherlands, on the contrary, rent for short periods, to avoid the inflexibility of a long commitment, which cannot be assigned to another. A Dutch business user who wants security of tenure coupled with capital growth buys the freehold of the space, for a rental lease brings no capital growth to the lessee. As a result, more commercial space is held freehold in the Netherlands than in Britain. This results in smaller buildings and in the absence of business parks, which are managed as a whole. In both countries there is a market in commercial space, but even without government measures (intervention) and even though the technical and financial requirements of the business users in both countries are similar, the land use is different. The cause of the difference is the difference in rights in land”. Coase (1988) already pointed out that the initial delimitation of legal rights which relates to who owns the rights in a given location, who has responsibilities, duties, rights, etc. with respect to land, affects the final outcome of market processes. Needham (2006) continues this approach, e.g.: “If, for example, land ownership in an area is fragmented between many people, it will be difficult for those people to change the use of their land radically, for the use of one parcel is affected by the use of other parcels, and coordination between the landowners is very difficult to achieve. If the land in that area is owned by one person, he has many more possibilities to change the use. If, to take another example, all the land near to a proposed waste disposal site is owned by one rich person, he will be much more able to contest that proposal than if the land which would be affected is fragmented between several poor persons.”
Therefore, the attention to the assignment of property rights finds its justification. To understand urban dynamics correctly, we must take into account the role of the property rights distribution.
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The property rights regime in land, which is constituted by different formal rules in relation to land, specifies who may benefit or be harmed, and therefore, to whom belongs the economic right in land development. From the perspective of the property rights theory, the insecure (i.e. can be appropriated) and/or inefficient allocation of property rights is a potential externality problem. The recognition of this may easily lead to the close relationship between property rights and externalities, and other efficiency problems in the process of the provision of land. This allows presenting the assumption regarding the property rights regime in land development. It is that the property rights regime, the way the property rights are delineated and allocated in land development process, influence the development outcome and relates to all kinds of market failures like externality and public goods and other efficiency problems in the provision of land. Therefore, the property rights regime as a part of the institutional settings of the process of land development, ultimately determines the outcome (the quality and quantity) of the built environment (Figure 5.).
Figure 6. Assumption of the study and research focus
In this study focus will be on the relationship between the property rights regime and the processes of land development (Figure 5.). Rules within the property rights regime are seen as independent variables75. Outcome of the land development processes in the form of different methods of land development are seen as intermediary variables in explaining the failures in the development output (the dependent variable). It is assumed that the differences in the delineation and allocation of rights within the property rights regime explain the differences in the land development processes, in the form of the different methods of land development.
Different methods of land development can be further linked to problems which result as consequences of certain methods of land development. However, this is not a particular focus in this study.
75 Independent only for the purpose of focusing the scope of this research because in practise all rules are social creation.
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I believe that the new innovative contribution of my work is to make explicit the link between the distribution of rights within the property rights regime and the land development processes. It is different from the more general, and complicated nature of analysis of institutions in the development process.
5.2 Framework for analysing the impact of property rights regime on the development process Central in the analytical model adopted in this study, is the concept of rights within the property rights regime. The concept of the property rights regime was introduced in Chapter Three. A property rights regime in land development is defined as an integrated system of property rights connected to land that includes civil law, public law (e.g. planning law) and other types of law (like fiscal law and contract law) influencing the property market, (Geuting 2007). Therefore, it is a complex system of legal rules in relation to land, which can directly or indirectly influence the market performance. These rules in relation to land include legal and conventional aspects of property rights, as well as legal and conventional aspects of land use and development. The property rights regime defines land development structures, which could be more regulatory, cooperative or market like (Figure 7, see also Table 5).
Figure 7. The property rights regime in land development
Property rights are not always legally enforced but include various rights grounded in conventions, culture, relationships, and many other (sociological) elements. Sometimes it is impossible to discuss one without referring to another, and I agree with this. However, in the concept of the property rights regime used in this study, the main focus is on those rules which are legally enforced and further their application in practice.
An approach, which is proposed for discussing the role of the property rights regime in the land development process, can be called ‘rights in property rights regime’. An analytical approach assumes that within a property rights regime, an investigation shall be made concerning delineation and allocation of rights and duties between parties involved in the development process in relation to different aspects of that process. Because the property rights regime is such a complex system built up of many rules in relation to land, this study limits the focus to certain aspects only. When I look at the property rights regime as an institution, I try to identify the characteristics of that institution. Therefore, the characteristics which are possible explanatory variables for the different types of property rights regime will
Property rights regime
System of property rights connected to land that includes public and private law Land development structures
Market Regime Regulatory Regime Cooperative Regime
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be identified. In the next step the delineation and allocation of rights in respect to the selected explanatory variables will be investigated further and connected to land development processes. In this way possible links between distributions of rights within the property rights regime and the processes, or problems that appear in the process will be reported. In this research the focus will be on the link between explanatory variables and the processes of the land development.
Figure 8. An analytical model to study the role of the property rights regime in land development process
The characteristics of property rights regime as an institution, which I call explanatory variables, provide an overview of the elements of the property rights regime that may explain differences in the outcome of land development processes. The possible characteristics of property rights regime in land development process are presented in Table 9.
Table 9. The characteristics of property rights regime as an institution in land development process The characteristics of property rights regime as an institution
Legal and conventional aspects of property rights - the scope of property rights
Legal and conventional aspects of land use and development
- the position of each actor involved in the development process regarding the allocation and use of land,
- the availability of instruments to achieve the goals of land policy
o rules concerning revitalisation processes, public private partnership, treatment of externalities, etc.
o certainty versus flexibility in the development control
- distribution of the economic rewards and costs of resource-use decisions Delineation and allocation of
rights
Property rights regime in land development
Explanatory variables which define the characteristics of the property rights regime
Processes Different methods of land development
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These explanatory variables are characteristics of property rights regime, which seems to have a key influence on the process of land development. The summary in Table 9 presents an attempt to build the comprehensive conceptual model providing a more complete overview of the elements of the property rights regime that may explain differences in the outcome of land
These explanatory variables are characteristics of property rights regime, which seems to have a key influence on the process of land development. The summary in Table 9 presents an attempt to build the comprehensive conceptual model providing a more complete overview of the elements of the property rights regime that may explain differences in the outcome of land