Sep 13, 2019

What are “Development Dividends,” and Could They Stimulate New Housing Stock?

The “collective action problem” is an omnipresent dilemma in public policy. Many bad laws get or stay on the books because of the uneven way that benefits and costs are dispersed among society.

Often, a small and engaged group will enjoy the lion’s share of the perks of a bad policy. Such windfalls give them a strong incentive to mobilize and protect their benefits from pesky reformers. The costs, meanwhile, are usually dispersed across a large swath of society.

On net, the costs far outweigh the benefits. But since the cost to each individual is only a few dollars a year, it just doesn’t make sense for them to take the time to attend public hearings and lobby their representatives to roll back the bad policy. So socially detrimental policies often have an unfortunate stickiness to them.

The Collective Action Problem and Housing Supply

This dynamic can explain much of the housing crisis in the US.

Across the country, laws on the books prevent new housing, to the detriment of renters and new residents who are locked out of the nation’s most desirable job markets by sky-high prices. New development could alleviate price pressure and expand access.

Many groups of people are affected by housing rules in disparate ways. First, there are property owners who wish to sell to developers, developers who want to build new housing, and construction workers who will be employed by the project. They face very concentrated costs, as housing regulations prevent them from making money.

Second, there are homeowners whose property values and access to non-congested amenities are protected by regulations. They all enjoy benefits and wish to protect them. Maybe not everyone will show up at a town hall meeting to raise a fuss about new developments, but enough of them usually find it worth their while to do so, and they are often successful at blocking new development.

Finally, there are renters, who suffer the diffuse costs of low housing access and high rent imposed by housing restrictions. But the costs are not high enough for many of them to organize and advocate for new housing. Especially when those renters are lower-income, they simply may not have the time.

Currently, the second group is of the optimal scale and location for organized action. It is not surprising, then, that local homeowners can so frequently prevent planned housing projects. If the incentives facing the other two groups were changed, perhaps they too would enjoy a better scale for organization and therefore practical success.

Is there a way to break through the collective action problem which stymies new housing development and therefore lower rents? Mercatus senior research fellow Salim Furth suggests one idea, called “development dividends,” that could help break through the thicket of incentives that leaves renters without a proportionate voice.

What Are Development Dividends?

Furth’s new policy brief explains that with development dividends, “a property owner or developer could enlist qualified local residents” to advocate on behalf of a development “by giving them a limited equity stake in housing construction, a right that would pay out a specific dividend if the project were successfully completed.” It is an arrangement that gives potential beneficiaries from new development “skin in the game” to advocate for the new housing because they will only be paid if the development is completed.

The idea is to try to even out property owners’ “concentrated benefits” by compensating for renters’ “diffuse costs” to bring them to the table and reflect a broader expanse of the affected parties. Perhaps compensating affected renters will elicit enough support for new development to overcome barriers erected by the disproportionate benefits that property owners receive from things like zoning restrictions and NIMBYism. If successful, development dividends could possibly help stimulate new housing stock across the country.

How Might It Work?

There are a few ways that a development dividend program can be administered. It can be 1) run by a private organization, 2) it can be written into city growth rules, 3) it can be made a mandatory precondition for new construction, or 4) it could be imposed on the state level for any project that meets a minimum dividend threshold.

Furth provides sketches of how each iteration could work out in the brief. Since options three through four operate through government mechanisms, and therefore could introduce their own inefficiencies or favoritisms, they are not ideal for success. We will focus on the private organization case study here as the simplest and most promising.

Let’s say that an organization is formed to promote housing affordability and new development. It creates a portal that connects verified developers with verified renters interested in supporting new development. All parties will be required to submit proof that they indeed are developers or renters that have resided within a certain area for so many years, along with personal information about their income and household.

A developer who wishes to build new housing in a politically-contentious area can post notice of their project, for what they will need support, and an offer of development dividends for renters who back the project. Renters are randomly matched with projects, although preference can be given to people within a certain ZIP code or income range. Developers keep renters abreast of the project as it continues, and enrollees can opt out at any time.

Here is one example Furth envisions:

“Ms. Arons owns land zoned for commercial use worth $2 million but believes she could sell it for $4 million if it were rezoned to allow mixed residential-commercial use. She offers 200 dividends of $750 apiece via Acme’s web interface. Acme matches Arons to 200 qualified individuals, 120 of whom live in the same jurisdiction. At a public meeting considering the proposed zoning change, renters—many of them development dividend owners—speak in favor of the change. With strong community support, local zoning officials enact the change. When the zoning change is finalized, Ms. Arons pays out the dividends and puts the property on the market.”

In this example, the dividend helped a developer and local renters overcome opposition to rezoning because development dividend owners take part in the public conversation. Furth also notes that local regulators may take the benefits from development dividends into consideration when evaluating how the community will be affected by the new housing.

Thinking Outside the Box

Development dividends are just one suggestion on how to break the collective action problem that disincentivizes affected parties from participating in the political process. In this case, it can also help to restore affordability and dynamism to housing markets in high-cost metro areas.

Land use reformers often seek to alter institutional arrangements that favor restrictive land use rules in order to expand housing access. Development dividends are one way to affect change within the existing system. Small-scale case studies can provide more insight into just how developers, policymakers, and advocates for affordable housing can apply development dividends to encourage housing growth.

Photo by Justin Sullivan/Getty Images

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