Market Failure: Information Asymmetries and Resultant Conservative Land Use Policies

Posted: 14 September 2013 in Everything Else..., Local Issues

This post is another that is relevant to my hometown and the challenges we face here.  Background reading (here and here) may be required to understand parts of it but I hope that the message’s relevance to other communities will not be lost.

Markets fail when transactions do not result in efficient outcomes from a societal point of view.  One cause of market failure concerns the problem of one partner in a transaction having more or better information than the other.  The lack of (quality) information by one party leads to power imbalances that can harm one party and inappropriately confer benefits on another that a free market transaction would not allow.

Two recent examples of information asymmetries related to land use decisions in and around Davis explain why we as citizens tend to approach such decisions in what appears to be narrow, self-interested and ultimately very conservative ways.  In both cases it is clear that one party in the transaction possesses more and better information that risks placing the City at a disadvantage in the transaction it is negotiating.

1. The Cannery project, whatever its value in terms of housing provided, suffers from a significant problem of lack of connectivity to the rest of the city.  This is especially true for alternate forms of transportation such as biking and walking.  This problem is significant because the City has set clear goals concerning the reduction of carbon emissions—most of which are generated by transportation choices.  Developing Cannery in a way that people living there have choices concerning transportation is therefore in the City’s interests and the City should negotiate any agreements with owners/developers/builders with this goal (among others) in mind.

But citizens are at an information disadvantage because the owners can merely say (and have said), “What you are requesting (in two grade separated crossings, for example), is too expensive.”  But of course the question in return must be: “Too expensive relative to what?”  Since the owners/developers/builders are not required by law to disclose how much they stand to earn from the City’s decision to change the zoning classification that will allow them to develop it according to their wishes, it is not possible for citizens to judge the veracity of the owner’s statement

Of course the City can hire (and apparently has hired) an independent firm to estimate this. Of course the owner can merely dispute these estimates.  The result is that the citizens of Davis are not privy to the actual information and therefore cannot determine whether they can and should press for the preferred infrastructure changes.  Further, when the owner asserts that it has the best interests of the City of Davis in mind and also wants “connectivity”, this assertion is not useful information (from a transaction point of view) because it may or may not be true.

In addition, the owner has much more information about the City because the City is required to conduct its business in a transparent way whereas the owner is not required to disclose private deals that concern the property.  The owner also has information about individual decision makers and their needs and what it may take to sway them to accept its proposals.  This is not an accusation of wrongdoing but merely highlights that information asymmetries exist at multiple levels and leaves citizens in a position of not really knowing whether they are getting all they might get out of the project.

2. The so-called “land swap” concerning the Shriner and Mace 391 properties also suffers from information asymmetries—also at several levels.  Peripheral development will always be a cause of much public debate in this City given the value of the surrounding land for agricultural purposes, concerns about sprawl and the need to consider the best ways to grow revenue and jobs for Davis. However, the debate is almost always constrained by the lack of full information available to citizens that will inform them as they negotiate with landowners/purchasers/developers.

In this case there are several pieces of information held by those proposing the project but not shared with the public.  This information would greatly enhance the citizens’ ability to consider the pros and cons of the project and negotiate from an informed position. These include (but are not limited to):

  • What information indicates that 493 acres is necessary for a park?  What market research indicates that this size is critical?
  • What kinds of firms have indicated an upfront interest in moving into such a park should it be developed?  (I realize that it is not possible to name the firms—there are privacy issues that must be considered, but what kinds and size of firms from what sectors have expressed interest would seem to be the kind of information that should be forthcoming).
  • What are the 2:1 mitigation options that have been considered, and are they demonstrably in the interests of the City? Or does mitigation occur on land far away in a way that does not preserve farmland of equal value to that which is lost?

Again, it is not helpful for those proposing the project to merely state that “This project is a win/win for the City” or “As long-term residents of Davis we have the best interests of the City in mind”.  This information does not inform the discussion but merely opens any critique of the project into accusations against those making the critique of engaging personal attacks against people who clearly have the best interests of the City in mind.

Further, as in the case of the Cannery, those proposing the project have much more information about City decisions and have the ability to use that information as leverage points to sway votes in their direction.

Is any of this evil?  No.  It is just good old deal making.  It is people acting in their self-interest to achieve an end that will benefit them financially.  There is nothing evil in that and I do not begrudge them of it.  However, we as citizens must recognize that we are at an information disadvantage here.  We need to acknowledge that significant information asymmetries exist and they risk placing us in a position of achieving a less than optimal transaction from the perspective of what our City needs.

This explains why I, and many others, approach such transactions in a very cautious way.  This is why we ask for things like Measure R and “slow go” approaches.  We know that the asymmetries exist and we want the time to gather as much information as we can. We want to compel those proposing such “deals” to expose as much information as possible.  We want to create less information imbalance so that our interests are not subordinated to the interests of others.

I have no illusions that we will ever achieve something approaching “Pareto optimal” outcomes in such transactions but it is absolutely in our interests to reduce the asymmetries as much as possible to achieve outcomes that contribute to the broadest social good as possible.

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