Elsevier

Ecological Economics

Volume 156, February 2019, Pages 409-419
Ecological Economics

Analysis
An Analysis of the Factors Influencing Transaction Costs in Transferable Development Rights Programmes

https://doi.org/10.1016/j.ecolecon.2018.05.018Get rights and content

Abstract

Transferable Development Rights (TDR) programmes have been introduced as an alternative to traditional regulatory instruments with proponents arguing that the implementation of these alternative programmes leads to similarly effective land-use outcomes with greater efficiency and equity. The evaluation of land-use policies is key to improving policy design and implementation processes, and particularly important when considering whether alternative policy instruments such as TDR deliver preferable outcomes. While some researchers have tried to identify the factors affecting TDR success, there has been little research about institutional aspects and the related transaction costs of TDR programmes, and their potential effect on policy outcomes. The presence of significant transaction costs decreases the efficiency, and can have a negative effect on the success of TDR programmes. This paper explores the transaction costs that may arise in TDR programmes with the specific objective of gaining a better understanding of which factors influence transaction costs in these programmes and why such costs arise. These factors are examined under three categories; 1) the characteristics of the transaction; 2) the characteristics of the transactor; and, 3) the characteristics of the policy. The paper also examines the different effects of these factors on different parties involved in the TDR programmes.

Introduction

Traditionally, direct government interventions, using regulatory instruments in the form of zoning, development control, acquisition and eminent domain, and purchase of development rights (PDR) programmes, have been the predominant view in planning practice (Wang et al., 2010; Rydin, 1993; Heimlich and Anderson, 2001). However, the efficacy of these instruments has remained a critical concern among planners and economists. The principal criticisms allege relatively low efficiency and effectiveness, inequitable outcomes, and significant transaction costs (Fischel, 2000; Rydin, 1998; Pogodzinski and Sass, 1990; Mills, 1989; Heikkila, 2000; Nelson, 1977). There is also an increasing scepticism about the ability of the regulatory authorities to manage land use and development in an efficient and equitable manner. Due to a lack of sufficient knowledge and information, it is likely that regulatory authorities underestimate the real costs of losing development potential or adapting inappropriate restrictions on valuable lands for preservation (Wang et al., 2010). On the other hand, some planners argue that these instruments are associated with high transaction and social costs. These costs include both administrative and information costs, as well as opportunity costs of not developing or improving the more beneficial areas of society (Mills, 1989; Pogodzinski and Sass, 1990). Given these costs and problems, it has been argued that these instruments fail to achieve their objectives and, in particular, they fail to result in optimal land-use patterns (Clinch and O'Neill, 2010; Nelson, 1977; Fischel, 2000).

Having recognised the inefficiency of the traditional regulatory instruments and their shortcomings, increasing numbers of land-use planners and economists have been proposing the implementation of alternative market-based instruments to implement and manage urban plans (Janssen-Jansen et al., 2008; Micelli, 2002; Clinch and O'Neill, 2010). Moreover, successful implementation of market-based instruments in environmental policy has generated greater optimism and enthusiasm for their application in land-use planning. The principal reason for the proposition is that such instruments are more likely to promote efficient (least cost) outcomes in terms of, for example, compliance with an environmental objective, and more capable of providing an equitable distribution of the marginal costs of preservation through a transfer of funds between parties. In addition, the market mechanism addresses the information failures that make it difficult for planners using traditional instruments to achieve the same results.

The Transferable Development Rights (TDR) approach is one of the market-based land-use policy instruments, which has been introduced as an alternative to the traditional regulatory instruments, such as zoning. TDR programmes have been used in the USA and a number of other European and Asian countries for preserving farmlands and ecologically sensitive areas, as well as directing future development (Janssen-Jansen et al., 2008; Chan and Hou, 2015; Shahab and Azizi, 2013; Wang et al., 2010). The Coase theorem is usually considered as the ‘intellectual foundation’ of TDR programmes (Wang et al., 2010). According to Coase (1960), market interventions are not always desirable, and net social benefits can potentially be maximized, without state regulations, through clarifying property rights and also minimizing transaction costs. In other words, the Coase Theorem affirms that, in dealing with externalities, where transaction costs are negligible, if property rights of any resource can be clearly attributed, market transactions would lead to more efficient outcomes than state interventions, through negotiation between parties, regardless of the initial allocation of resources (Clinch et al., 2008). TDR programmes commodify development rights and (re)establish markets for these rights in a way that they become the currency of development. In essence, TDR programmes are designed to assist in defining property rights and establishing a property rights market, which can replace direct forms of government intervention in order to internalise externalities and cope with market failures (Shahab et al., 2018b). Using the terminology of TDR, planners determine ‘sending areas’ that are undesirable or less desirable for development and ‘receiving areas’ which are designated areas for development (Pruetz and Pruetz, 2007; Nelson et al., 2011). Under traditional zoning, those in the ‘sending areas’ suffer a welfare loss as they are not entitled to develop and those in ‘receiving areas’ gather significant rents from being conferred with the right to develop. However, in a TDR programme, those in ‘receiving areas’ must purchase development rights from those in the ‘sending areas’. Thus, the approach is consistent with the ‘polluter pays principle’ whereby there is, effectively, a charge imposed on the developers and compensation to those who are denied the development right. In this way, the approach is considered to be more equitable than traditional instruments.

In spite of growing implementation of TDR programmes, there has been little evaluation of their design, process, and outcomes (Chan and Hou, 2015; Clinch and O'Neill, 2010; Machemer and Kaplowitz, 2002). The main focus of TDR evaluation studies thus far has been identifying the factors affecting TDR success through the study of established TDR programmes (Chan and Hou, 2015; Kaplowitz et al., 2008; Pruetz and Pruetz, 2007; Machemer and Kaplowitz, 2002; Aken et al., 2008). Some studies, however, show that many TDR programmes have not met planners' expectations (Pruetz and Standridge, 2008) and some researchers believe that the relative cost-effectiveness of market-based instruments, in general, has been exaggerated and requires assessment with a more appropriate and realistic approach (Stavins, 1995). The issues surrounding transaction costs, and other institutional aspects of designing and implementing TDR programmes, are argued by some authors to be of importance in determining and evaluating the success of these programmes (Shahab et al., 2018). The size, type and distribution of transaction costs can affect the efficiency, effectiveness, and equity of TDR programmes (Bruening, 2008; Janssen-Jansen, 2008; Shahab et al., 2017; Messer, 2007) and can hinder people from participating in the programmes (Tripp and Dudek, 1989; Nelson et al., 2011).

Despite these debates, there has been a lack of empirical studies and analyses of transaction costs in TDR programmes, and their potential effects on the success of these programmes. The objective of this paper is to address this gap by exploring the factors which influence transaction costs in TDR programmes, as well as seeking to understand why they occur and, thereby, to highlight where account needs to be taken of such costs when designing and analysing these programmes so as to enhance their efficiency and equity. Transaction costs arise in both policy design and policy implementation stages, nonetheless, this paper mainly focuses on the costs involved in operating and participating in existing TDR programmes. This paper aims to enhance understanding of what determines the level of transaction costs in TDR programmes by analysing how some specific factors influence it. The paper goes on to discuss the effects of these influencing factors on different stakeholders and parties involved in TDR programmes and seeks ways to reduce such costs.

Section snippets

What Are Transaction Costs?

Coase (1937), in his seminal paper ‘The Nature of the Firm’, introduces the concept of transaction costs to the study of firm and market organisation. Transaction costs are often defined as costs that are involved in exchanges or transactions, other than the sale price, in other words, all the costs that are not directly related to the production of that product (Nilsson and Sundqvist, 2007; Webster and Lai, 2003). Although many authors have discussed this concept, consensus about the

Factors Influencing Transaction Costs in Land-use Policy Instruments

Many factors have been shown to influence transaction costs in different policy areas, such as environmental, agricultural, and natural resource policies. In the land-use planning literature, Shahab et al. (2018a) advances a transaction costs framework for evaluating land-use policy instruments building on prior works of inter alia Coggan et al. (2013), McCann (2013), Ducos and Dupraz (2007), Ducos et al. (2009), Mettepenningen et al. (2011), Nilsson (2009), Knowler and Bradshaw (2007), Rørstad

Methodology

This research has utilised a case-study approach in order to examine the factors influencing transaction costs in TDR programmes. The case study, as a research method, is a well-established technique in the field of land-use planning. The ability of the case study methodology to be utilised, in learning about, obtaining data, understanding phenomena and processes in local contexts, and integrating multiple methods, makes it a powerful research method in land-use planning (Thomas and Bertolini,

Results: Factors Influencing Transaction Costs in TDR Programmes

Using the analytical framework of Table 1, this section presents an analysis of the factors influencing transaction costs in TDR programmes, based on the interviews with key interviewees from across the four TDR case studies. Each factor is examined to find out whether, and how, it influences transaction costs in these TDR programmes. This section also highlights the different effects of these transaction costs' factors among the parties involved and across the TDR case studies.

Summary and Conclusions

Land-use planners use a number of policy instruments to achieve their policy objectives. TDR programmes are a market-based approach that has been implemented in several jurisdictions in order to protect ecologically sensitive lands, to preserve farmlands, and to redirect future development potentials to more preferable areas. The evaluation of market-based instruments, such as TDR programmes, is particularly important because of their introduction as an alternative to traditional regulatory

Acknowledgments

The authors would like to thank the developers, landowners, programme administrators, land-use attorneys, and brokers, who kindly gave their time to be interviewed, as parts of this research. The authors also thank Marie Howland and Casey Dawkins, University of Maryland, for support during data collection. This research was supported by the Irish Research Council (IRC) (GOIPG/2013/342) Government of Ireland Postgraduate Research Scholarship Fund and the Environmental Protection Agency (

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