Private government, property rights and uncertain neighbourhood externalities: Evidence from gated communities

Abstract

Economists traditionally view public and private land use regulation as alternatives to each other. An alternative view argues that public and private regulation are not equally suited to accomplish the same outcomes. In particular, government regulation is easily changed while private regulation is not, making the latter better suited to control future externality risk. One implication of the alternative view is that more risk-averse households are drawn to gated neighbourhoods while their less risk-averse counterparts are not. This paper exploits exogenous differences in neighbourhood amenity uncertainty created by public school attendance zone changes to test this prediction of the alternative view. The results show that greater exogenous amenity uncertainty yields stronger house price capitalisation in gated subdivisions than in open neighbourhoods, a pattern consistent with the risk-aversion sorting hypothesis. The results are robust and are consistent with the key implication of the alternative view of private regulation.