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.

Is HOA capitalized in housing price? Evidence from Chongqing, China

“…They argued that deed restrictions and neighborhood restrictive covenants represent private land use contracts for reducing neighborhood externality risk. A further study along the same line is Turnbull and Zahirovic-Herbert (2020), who found that greater exogenous amenity uncertainty, as represented by public school attendance zone changes, yields stronger house price capitalization in gated subdivisions than in open neighborhoods. The reason is that in the USA, government regulation is easily changed while private regulation is not, making the latter better suited to control future externality risk.…”