The governance of gated communities and its impact on housing price in China

Abstract

After the period of tens of thousands of gated communities were built since the 1990s in China, the urgent concerns now is how to better manage these gated communities. Besides outsourcing Property Management Companies for management services, there are quite a few gated communities in China managed by owners, Danwei, or even Neighborhood Committee. Another Interesting phenomenon is that almost all the initial governance arrangements of gated communities in China were not chosen by homeowners, but by landholders / developers. Because homeowner associations were established far later than the communities were built and they only exist in a small fraction of gated communities. After all the apartments in the gated communities are sold, some landholders / developers still retain the ownership of certain facilities or spaces such as parking lots, swimming pools and so on. On the other hand, the cost of changing governance arrangement is costly. Not only because of the resistance from the original management organization, but also because of the difficulty for diverse property owners to come to a consensus. This illustrates the corollary of Coase’s Invariance Theorem: when transaction cost is high, initial assignment of rights matters. This study elaborates the collective ownerships and the fragmentation of property rights in gated communities. The unclearness of property rights and incomplete initial arrangement of property rights lead to lots of transaction costs during signing the property management contract between principal and agent. In order to find out the factors determine the choice of governance arrangement with the lowest transaction cost and production cost, this study estimates the hedonic price models of based on 27,000 transaction records of housing units to reveal homebuyers’ preferences on governance arrangement under different situations. The empirical results of this study show that asset specificity determines whether the governance structure is better to be in-house or outsourced. The empirical results are not only consistent with Asset Specificity Theory, but also suggest that the cost of protecting effective rights dramatically affects the choice of governance arrangement. Clearing the effective rights between landholders and homeowners causes conflict costs among principals. The importance of homeowner association in neighborhood governance has been confirmed, as homeowner association helps reduce these conflict costs. Clearing the effective rights between principal and agent causes agency costs. This study also verifies Property Management Company is better than Neighborhood Committee, due to the more unified goals and the less asymmetric information. The cost of protecting effective rights largely relies on the initial arrangement of property rights. Therefore, this study finds and proves the initial arrangement of property rights is also one of the most important determinants for governance arrangement, which takes one step further from Williamson-style specific asset determinism. Moreover, this study also finds the product efficiency is determined by the initial arrangement of property rights. Through examining the difference effect of club goods and local public goods on housing price, the results prove homebuyers value the products which have clearer ownership more. It finds neighborhood goods are not only priced into Chinese neighborhood market; but have more positive effect on housing price than government-supplied local public goods. Lastly, as neighborhood size is the key context for neighborhood governance, the study also tests the optimal neighborhood size for different governance arrangements. The results prove Transaction Cost Economics on the integration and boundary of an organization, which is determined by the production cost and transaction cost as well. The gated community should be large enough to reach economies of scale, meanwhile small enough to avoid the impossibility of selective intervention. Transaction Cost Economics in management service of Chinese neighborhood market is testified empirically. All these results are useful to identify the optimal institutional arrangements for urban collective facilities with unclear property rights.