Environmental Valuation & Cost-Benefit News

Abstract: This paper examines the role of local housing market conditions for social capital
accumulation and neighborhood club good provision. A model of individual investment
decisions predicts that in a setting with high property transaction costs (i) homeowners are
more likely to invest in social capital than renters and (ii) the positive link between
homeownership and social capital is stronger in more built-up neighborhoods with inelastic
supply of new housing. In these neighborhoods homeowners are largely protected from
inflows of newcomers that would dilute the net benefit from social capital in the longer run.

Empirical evidence from the Social Capital Community Benchmark Survey confirms the
model predictions. Instrumental variable estimates suggest that the effects are causal.

1 Introduction and Background
The monitoring of one’s property by friendly neighbors or watch groups, a neighbor
holding one’s spare key, BBQ-parties among closely connected neighbors, or a pool of
trusting parents that look after each other’s children are all examples of club goods that are essentially the result of accumulated social capital among a group of contributing neighbors.

In this context, DiPasquale and Glaeser (1999) have argued that homeowners are ‘better
citizens’ because homeownership (i) creates barriers to mobility and (ii) gives individuals an incentive to invest in local amenities and social capital since community quality is capitalized into property values.

Simple stylized facts from the Social Capital Community Benchmark Survey (2000),
suggest, however, that homeowners may not always be ‘better citizens’. For example, while
homeowners, compared to renters, on average socially interact 30 percent more often with
immediate neighbors in essentially built-up neighborhoods (more than 85 percent developed),
the difference between the two groups is only about 9 percent in an ‘average’ neighborhood
(45 to 55 percent developed) and there is virtually no difference between the two groups in
little developed neighborhoods (less than 15 percent developed). These numbers change little
when other factors – including population density in the developed area – are controlled for.

How can this be explained? In this paper Christian A. L. Hilber arguesthat property transaction costs (interpreted broadly) create incentives for homeowners to invest in social capital because it discourages free riding. Homeowners can in principle free ride on other neighbors’ social capital investments by selling their property and pocketing the proceeds from the improved neighborhood quality. However, such free riding is not an attractive option if transaction costs exceed the benefits derived from the improved neighborhood quality. In a world with high transaction costs the question then becomes whether the homeowner’s long-term benefits derived from social capital exceed the costs and Hilber will argue that the answer to this question crucially depends on the elasticity of new local housing supply – proxied by the share of developable land in the neighborhood.
...
The empirical evidence presented in this paper provides strong support for the view that
in a world with high transaction costs the elasticity of new housing supply – as proxied by the share of developable land in the neighborhood – is an important determinant of a household’s social capital investment decision. This is true even when controlling for the population density within the developed area of the neighborhood and many other characteristics that are expected to affect social capital accumulation and even when using instrumental variable (IV) estimates that treat the share developed land, the population density and the respondent’s homeownership status as endogenous. The empirical analysis also tests and confirms other elements of the theory and discounts alternative explanations of the empirical findings.

Keywords: House price capitalization, social capital, homeownership, land and housing supply, neighborhood club goods.

by Christian A. L. Hilber; London School of Economics, Department of Geography and Environment, Houghton Street, London WC2A 2AE, United Kingdom. Telephone: +44-20-7107-5016. Fax: +44-20-7955-7412. E-mail: c.hilber@lse.ac.uk.

Munich Personal RePEc Archive MPRA http://mpra.ub.uni-muenchen.de
Research Papers in Environmental and Spatial Analysis No. 123
August 2, 2007
http://mpra.ub.uni-muenchen.de/5134/01/MPRA_paper_5134.pdf