The Gridlock Economy

In American suburbs, home owners are the voting majority; in cities, renters may be the crucial pressure bloc.  Local officials, wanting to keep voters happy, create more and more mechanisms to restrict development:  environmental impact reviews, architectural review boards, subdivision regulations, historic preservation districts, landmark commissions, building permit requirements, rent controls -- all part of the multilayered gauntlet of American land-use controls.  Think of each of these mechanisms as a phantom tollbooth along the road to real estate development.  Each tollbooth may have made sense on its own terms when initially enacted.  Collectively, however, regulatory layering adds up to gridlock with mind-boggling costs for society.

That's from The Gridlock Economy, by Columbia law professor Michael Heller.

Lots  of people are familiar with the "tragedy of the commons," in which a shared resource is overused because no single decision maker can exclude use by others. Examples are overfished oceans, overharvested lobster beds, and congested highways.  Heller analyzes the "anti-commons," in which a resource is underused because ownership is too fragmented.  When too many people have a veto, one of them is bound to exercise it.  Drug development, for example, is stymied by a thicket of patents on basic genetic research.

Land-use policy is rife with anti-commons.  Fragmented parcels of land are next to impossible to assemble for large redevelopment; the only existing solution is often the troubling exercise of eminent domain by the state.  Regulatory approvals are not technically property rights, but they have the same effect when highly fragmented; too many cooks spoil the broth.  (Heller calls these "BANANA republics" -- "build absolutely nothing anywhere near anyone.")

Heller also points out an often overlooked consequence of overregulating land-use markets.  By driving out the least sophisticated, small-scale developers, brambles of regulations make the markets more profitable for sophisticated developers:

Although they are bad for society as a whole, BANANA republics, like most forms of gridlock, offer profit opportunities for savvy investors -- in this case, regulatory arbitrageurs.  As the New York Times noted a few years ago, "Some of the largest publicly held real estate investment companies say they would rather own property in Boston than in Atlanta and Dallas.  Steven Roth, the chief executive of Vornado Realty Trust, says there is an easy way to explain this seeming paradox.  It is difficult to build in Boston where land is scarce, residents are vocal, and zoning disputes can last years.  The opposite is true in Atlanta and Dallas,  'Whenever it's almost impossible to add supply,' Mr. Roth said, "that's where I want to invest.'"

Big developers enjoy economies of scale that allow them to invest in regulatory expertise.  It's the local developers who suffer most from the regulatory gauntlet.