Thursday, February 22, 2018

Cohort hoarding

An important and often unremarked reality. From How Building Regulations Subsidize Mansions by Alex Tabarrok.
Consider the buildings below: a mansion on a 1 acre lot in Atherton, and a 350 unit mixed use condo on a 1.6 acre lot 2 miles further up the peninsula in Redwood City. The mansion just sold for $6m. The condo building, when finished, will probably fetch hundreds of millions.

If it weren’t for Atherton’s zoning code, you’d never be able to buy that mansion for a mere $6m. A developer that wanted to tear it down and build condos could bid far more than that. But the zoning code mandates single-unit buildings with a floor area ratio below 18% on lots of at least 1 acre, so $6m it is. Quite the bargain.
I would call this an example of cohort hoarding.

There is a lost valuation of externalities between the restricted value dictated by the zoning rules and the valuation set by an unrestricted market. If my mansion under zone controlled regulation is worth $10 million and the land is worth $100 million under free market conditions, why would I put up with that lost valuation?

I call into being the concept of informal oligopolistic multi-generational cohort hoarding. Sure, under restricted zoning requirements, the value of land is suppressed but the annual increases in value can still beat the general market if the zoning creates a positional good valuation. People don't have to know one another or even coordinate but they need to share some degree of cohort shared identity. Non-estimable externalities compensate for the lower land value arising from restrictive regulations.

Yes, my mansion is only worth $10 million compared to its free market value of $100 million. In this extreme example, the unrealized value of $90 million must equate to the value that that particular cohort attaches to living in such a selective environment (only equally accomplished, intelligent, wealthy people can live in my area with me). Some portion of that $90 million may actually be realized by unrelated network effects, i.e. financial deals and opportunities being generated and realized through high quality geographically determined network events (e.g. white-shoe law firm partner lands a large account with the start-up billionaire across the street).

Such enclaves of unrealized value can last generations as long as 1) they share a perceived cohort value, 2) they derive value from the aesthetic of exclusion, and 3) there is indeed some generative effect on value creation arising from network effects that off-sets some of the unrealized value. The unstable equilibrium will collapse if the cohort loses cohesion, if the valuation of exclusion collapses, or if there is no financial offset through network effects.

In that event, the first rats off the ship achieve a disproportionate share of the unrealized cohort value. Cohesion is imperative to sustain the zoning restrictions for exactly this reason.

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