Collective Goods and the Political Hold-Up Problem

Abstract

By extending the incomplete contract model to the provision of local collective goods, this paper formally analyzes the political hold-up problem between landowner and collective goods provider in urban land use. The model focuses on three-party contractual relationship and analyzes the impact of wage and rent capitalization, symmetric or asymmetric. The findings indicate that it is efficient to integrate landowner and collective goods provider when there is uncertainty in the provision of collective goods. This has been demonstrated by the growth of ground lease system and CIDs in recent decades. Rent capitalization further strengthens the conclusion. Under asymmetric rent capitalization, it is more efficient for landowner to acquire all non-mobile assets. Similarities and differences between urban institutions and the firm are also discussed. If management is regarded as a collective good, the findings in this paper may also shed light on a unifying theme between urban institutions and the firm. The difference between them lies mainly on the choice of political voting vs. corporate voting and the importance of externality for urban institutions.