Konzervatívny inštitút M. R. Štefánika v spolupráci s partnermi organizoval ďalšiu z cyklu prednášok Conservative Economic Quarterly Lecture Series /CEQLS/. Prednášal David Andersson, vedúci odboru ekonómie na Univerzite RMIT vo Vietname.

1. Entrepreneurship, regulation
and self-organization in cities
D.E. Andersson (Monday, April 29, 2019)
Bratislava, Slovakia
Sources:
“Real estate capital” (Ch. 11) in Andersson, ÅE and DE Andersson (2017)
Time, Space and Capital. Cheltenham: Edward Elgar, pp. 209-232.
Andersson DE and M Jia (2019) “Official and subjective hotel attributes
compared: online hotel rates in Shanghai.” Journal of China Tourism
Research, 15(1): 50-65.

2. Outline
• What is real estate capital?
• The importance of real estate capital
• Attributes of real estate capital
Illustrative example: hotel rooms in Shanghai
• Entrepreneurial self-organization in real estate markets
• System constraints
• Land use regulations
Illustrative example: Town Centre First (TCF)
Illustrative example: implicit regulatory tax
• Regulations, expectations and the value of real estate capital

3. What is real estate capital? (I)
Traditional classification: land; labor; “capital”  misleading
homogeneity
New classification: physical capital; human capital; social capital

Real estate capital: bundle of physical and social capital attributes
Real estate capital value: “the value of the sum of the expected future
(direct and indirect) utility of all [physical and social capital] attributes
associated with the specific unit” (Andersson and Andersson, 2017, p. 210)
3

4. What is real estate capital? (II)
Different categories:
1. Housing
2. Commercial properties
3. Industrial sites
Etc.
Note: Capital is not limited to commercial or industrial real estate;
dwellings are attribute bundles that make up physical and social capital
 households engage in unpriced production of a great variety of
goods and services (cf. Becker, 1976)
4

5. The importance of real estate capital
Eurozone: Value of households’ direct ownership of real estate
 €15 trillion in 2015
United States: Value of commercial property market
$11 trillion in 2009
• In post-industrial knowledge societies, the physical and social capital
embodied in immobile real estate is more important for the productive
potential of an economy than mobile physical capital such as machine tools
• Popular indices of economic freedom (Fraser; WSJ/Heritage) are somewhat
misleading, due to their neglect of freedom in land and real estate markets
5

6. 6
Attribute category Examples Type of
capital
Examples
Structural Lot size
Floor area
Age of structure
Physical Lot size
Floor area
Age of structure
Parks
Landscaping
L
o
c
a
t
i
o
n
Neighborhood Parks
Landscaping
School quality
Crime rate
Income level
Education level
Social School quality
Crime rate
Income level
Education level
Distance to employers
Distance to service workers
Accessibility Distance to employers
Distance to service workers
Distance to transit station
Distance to highway
Distance to airport
Physical Distance to transit station
Distance to highway
Distance to airport

7. 7

8. Illustrative example: hotel rooms in Shanghai
(hedonic price study)
Each-side Box-Cox function ( desirable distribution of
residuals)
Y() =  + 1X1
() + 2X2
() + … + iXi
() + … + kXk
() + 
where
Y() = (Y- 1)/ λ for λ ≠ 0; Xi
() = (Xi
 - 1)/  for  ≠ 0;
and Y() = ln Y for λ = 0; Xi
() = ln Xi for  = 0.
8

9. 9
Hotel attributes Mean Standard
deviation
Minimum Maximum
Price (CNY) 505.98 464.57 78 5374
Accessibility attribute (mix of social and physical capital)
Distance to center (minutes) 23.06 15.68 2 110
Objective structural attributes (physical capital)
Number of rooms 200.40 155.12 4 1162
Swimming pool (dummy) 0.22 0.42 0 1
Wi-Fi (dummy) 0.49 0.50 0 1
Free cancelation (dummy) 0.82 0.38 0 1
Official rating attributes (structural attribute combination/physical capital)
3,4 or 5 stars 0.79 0.41 0 1
4 or 5 stars 0.54 0.50 0 1
5 stars 0.25 0.43 0 1
Online feedback attribute (mix of all attribute types and both types of capital)
Overall score 7.21 0.81 2.9 9.3

10. 10
Table 3: Each-side Box-Cox-transformed hedonic price functions for standard double
rooms in Shanghai, 2016
Attribute Estimated coefficient Chi-squared
Constant 2.748
Official rating attributes (structural attributes; physical capital)
3, 4, 5 stars .065 55.48***
4, 5 stars .084 96.65***
5 stars .063 45.20***
Online feedback attribute (mix of attributes; physical and social capital)
Overall score .077 16.23***
Other structural and accessibility attributes; physical and social capital
Distance to center -.014 22.85***
Number of rooms -.001 0.62
Swimming pool (dummy) .044 20.72***
Wi-Fi (dummy) .012 4.03**
Free cancelation (dummy) -.037 18.95^^^
Regression statistics
Number of observations 622
Lambda () .256
Theta () -.268
**:p<.05; ***:p<.01 (one-tailed test; expected sign); ^^^:p<.01 (two-tailed test; unexpected sign).

11. Real estate entrepreneurship (I)
• Buildings may be made of stone, but the capital attributes that such
buildings embody are not set in stone
• Entrepreneurs introduce new valuable attributes to pre-existing
resources, including buildings and lots
Note: I conceptualize entrepreneurship as resource owners’ profit-
seeking judgment – on the use of owned resources – under conditions
of Knightian uncertainty (cf. Knight, 1921); maximizing/satisfying
framework does not apply to entrepreneurs, only to contractually
compensated owners of capital that they rent out
11

12. 12

13. Real estate entrepreneurship (II)
Example: Old independent hotel in HK  Ibis North Point
Entrepreneurial creation of new hotel attributes:
1. “Fifteen-minute satisfaction contract” (human and social capital)
2. New connections to global reservation and feedback networks (social
and physical capital)
3. New access to knowledge associated with the hotel such as English
proficiency of hotel staff (human capital)
• A typical example of how an existing physical structure evolves into a new
attribute bundle through the addition of valuable service attributes, with
increasing rental revenue as a result (i.e. entrepreneur’s E(MR)>E(MC))
13

14. System constraints (I)
• Subjective perceptions and imperfect knowledge  open-ended
bundle of attributes  open-ended opportunity set of future
entrepreneurial attribute creation associated with each property
• The entrepreneurial creation of attributes is an attempt to escape a
tight system constraint
When is a system constraint tight?
A system constraint is tight if competition is atomistic and institutions
are stable  expectations converge (“acognitive expectations”) 
markets enforce conformity with best expectations (“rational
expectations”)
14

15. System constraints (II)
When is a system constraint “loose?”
A system constraint is “loose” if competition is non-atomistic or if
institutions are unstable
• Entrepreneurs seek to escape atomistic competition by becoming
temporary monopolists  behavior reflects “cognitive expectations”
due to slack in the system  any point between the break-even point
and the profit-maximizing point is a point that the market sustains 
atomistic competition creates an incentive to discover new valuable
opportunities for attribute creation
15

16. Land use regulations
• Real estate markets are among the most regulated markets, along
with markets for health care and education
• Urban planning polices differ among nations and regions, with the
United Kingdom, Scandinavia, and Australia having among the most
regulated real estate markets
• In the most regulated markets, national and local government
intervention goes much further than conventional land-use zoning,
with dramatic effects on real estate prices, quantities, and location
patterns, as well as on the entrepreneurial creation of new types of
real estate attributes
16

17. Illustrative example: Town Centre First (TCF I)
• The Town and Country Planning Act of 1947 (UK) mandates that each
local planning authority (LPA) must formulate a local development
plan that designates each plot of land to a rather narrow “use class,”
and must ensure that each land use conversion requires LPA
permission, which typically can be denied if deemed in “the public
interest,” even if the conversion is in line with the local plan
• In England, even more restrictive land use regulations were
introduced in 1986 and 1998 through the new TCF policy  TCF
stipulates both a “needs test” and a “sequential test” for each new
commercial real estate project
17

18. TCF II
The needs test: a proposed commercial real estate project must
demonstrate that there is a “need” for a new project such as a
supermarket, and, additionally, that the new project does not reduce
the competitiveness of similar projects (e.g. other supermarkets) in the
same city
The sequential test: this means that the developer must show that
there is no available downtown site before a site in another
neighborhood can be selected; and the developer must also show that
no urban neighborhood site is available before an ex-urban site can be
selected
18

19. TCF III: Effects
• Cheshire et al. (2015) show that TCF caused a total decline of about 20% in
the total factor productivity (TFP) of English supermarkets, as compared
with the expected values without TCF  new supermarkets tend to have
undersized premises in logistically difficult locations
• Before 1988, TFP increased over time; after 1988, TFP decreased over time
• US supermarkets have always had higher TFP than UK supermarkets, and
US TFP for supermarkets increased especially fast in the 1990s, when UK
TFP was declining  combined effects of Town and Country Planning Act
and TFP implies much greater overall effect of English land use regulations
than 20% when compared with a US benchmark
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20. Illustrative example: implicit regulatory tax
• The optimal height of a building is given by the equality of the market
price per unit of land area and its marginal construction cost
• The optimal height is unique for each building, since the unit-area
price is location-specific, and the unit-area construction cost is an
increasing function of building height
Implicit regulatory tax: Percentage difference between market price
per unit of land area and its marginal construction cost
• The height restrictions that are common in European cities become
crucial here, such as the 13 views protected by the London View
Management Framework
20

21. Implicit regulatory tax II
Table 4: Regulations quantified as an implicit tax on office space as a percentage of
the price in 12 urban business districts, 1999-2005 (average)
City (district) Country Implicit regulatory tax (%)
London (West End) United Kingdom 800
London (City) United Kingdom 449
Frankfurt (downtown) Germany 437
Stockholm (downtown) Sweden 379
London (Canary Wharf) United Kingdom 327
Milan (downtown) Italy 309
Paris (downtown) France 305
Barcelona (downtown) Spain 269
Amsterdam (downtown) Netherlands 202
Paris (La Défense) France 167
Brussels (downtown) Belgium 68
New York (Manhattan) United States 25
Source: Cheshire (2011); Glaeser et al. (2005)
21

22. Regulations, expectations and the value of
real estate capital (I)
Strict land use regulations have four key effects:
1. They make real estate more expensive
2. They make the supply of new real estate less elastic
3. They make real estate markets more segmented, due to land use
conversion difficulties
4. They make it more difficult to predict future prices, both due to
activist policies that imply unstable institutions and inelastic supply
that imply big business cycle effects on real estate prices
 Subjective cognitive expectations become more important in the
formation of prices
22

23. 23

24. Metropolitan area House
price
(2012)
Household
income
(2012)
Price/income
(2000-2012)
Population
(2012)
Net domestic
in-migration
(2000-2012)
Texas: Dallas-Fort Worth and Houston
Dallas-Fort Worth $127,000 $43,300 2.7 6,500,000 +6.9%
Houston $128,000 $42,700 2.8 6,100,000 +5.6%
California: Los Angeles and San Francisco-Oakland
Los Angeles $272,400 $44,200 6.8 12,900,000 -11.4%
San Francisco-Oakland $436,000 $56,200 7.7 4,400,000 -8.3%
24

25. Key question
How can we ensure that an open urban development
framework encourages experimentation and innovation,
while avoiding the Hayekian knowledge problem
associated with most urban planning practices?

26. A key pre-constitutional question
 What governmental responsibilities/decisions would be conducive to the growth of
economic knowledge (entrepreneurship/ innovation) in the long run, and which
responsibilities /decisions would be detrimental?
General answer: rules and actions that are in the general interest, which generally
implies the principles of universal application, non-discrimination, stability, and open-
endedness.

27. A Hayekian perspective
 Market prices distil and transmit knowledge of the particular circumstances of
spatiotemporally situated individuals; there is no substitute for market prices as
disseminators of economic knowledge
 Successful entrepreneurial innovators profit from price discrepancies between
input prices and the prices of novel outputs (i.e. new consumption attributes)

28. GENERAL Fast processes Slow processes
Individual effects Private goods with low
durability
Private goods with high
durability
Collective effects Public goods with low
durability
Infrastructure

29. URBAN PLANNING:
EXAMPLES
Fast processes Slow processes
Individual effects Interior decoration
Temporary private use of
buildings and streets
Use of hotel rooms and
restaurants etc.
Housing
Office buildings
Retail developments
Private streets
Gardens
Collective effects Fairs
Festivals
Street demonstrations
and protests
Institutions
Large-area transport,
communication, and
utility networks
Large-area aesthetic
attributes (cultural
heritage etc.)

30. EFFICACY OF
MARKETS/PLANNING
Fast processes Slow processes
Individual effects No problems
False price signals
(knowledge losses)/
one-size-fits-all
Potential Knightian
uncertainty problems
associated with market
prices
False price signals/
one-size-fits-all
Collective effects Potential collective action
problem
False price signals
Potential uncertainty and
collective action problems
False price signals (can
be mitigated by means of
land value taxation)