The objective of this chapter is to further explain the theoretical perspective of the study. This chapter presents an analysis of the institutional approach starting with a presentation of definitions and delimitations of institutions in a general development discussion and in respect to land and property markets. It is followed by a discussion about the models of land development derived from the institutional approach. In addition, economic approaches to study institutions and institutional-economic models of land development are reviewed. At the end of this chapter my further research choice is explained.
2.1 Definitions and delimitations of institutions. Institutions in respect to land and property markets
There is a lot written about what really constitutes an institution. However, there is not one accepted definition of an institution. In order to explain this concept Douglas North26 (1990 p.3) should be quoted here to begin with:
“Institutions are the rules of the game in a society or, more formally, are the humanly devised constrains that shape human interaction.”
In the North (1990 p.3-5) sense “constrains that human beings impose on themselves” or
“structure incentives in human exchange” includes rules and norms that constrain human behaviour. These rules and norms refer to formal law and regulations, informal or customary rules, cultural norms or standards of behaviour. North (1990 p.4) distinguished between formal and informal rules, which create the framework within which individuals operate. The institutional framework can prohibit one from doing something or impose the conditions for undertaking certain activities.
“Institutions are made up of formal constrains (e.g., rules, laws, constitutions), informal constrains (e.g. norms of behaviour, conventions, self-imposed codes of conduct), and their enforcement characteristics.” (North, 1996, p.334)
North (1990 p.7) also distinguished between institutions and organisations. Organisations can use institutions and modify them. However, mutual influence exists between institutions and organisations:
“Institutions, together with the standard constrains of economic theory, determine the opportunities in a society. Organisations are created to take advantage of those opportunities, and, as the organisations evolve, they alter the institutions”.
26 Douglas C. North is the main contributor to Institutional Economics and received a Nobel Prize (together with Robert Fogel) in 1993. In his book in 1990 he used the metaphor of a football game. The actors in the market are considered the football players and the institutions are the rules that structure the game.
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Elinor Ostrom (1990, p.51) defined institutions as: “the set of working rules that are used to determine who is eligible to make decisions in some arena, what actions are allowed or constrained, what aggregation rules will be used, what procedures must be followed, what information must or must not be provided, and what payoffs will be assigned to individuals dependent on their action. All rules contain prescriptions that forbid, permit or require some action or outcome”. Ostrom also distinguished between formal law and working rules. She also realized that all rules are nested in another set of rules at several levels that define how the first set of rules can be changed. She distinguished three different levels of rules:
operational rules (directly affect the day-to-day decisions), collective-choice rules and constitutional-choice rules. This lead to the conclusion, that institutions should be analyzed at different mutually connected levels. For policy makers aiming to reform any institutional set-ups the existence of different levels of institutions with different time horizons of change should be studied carefully (see also Williamson 2000, Jütting 2003).
In relation to urban studies, definitions of institutions follow the general debate in economics.
Salet (2000) defined the rules or arrangements, which constrain and facilitate the functioning of the market in one of three broad types:
(1) “informal social rules dependent on cultural factors, belief systems, values (these might involve agency relationships and overlap the behavioural factors) …
(2) formal rules of regimes, specifically designed
(3) institutional reflection in practise; divergent behaviour types...”
Therefore when applying the institutional thinking into land and property markets the differences between formal and informal institutions shall also be emphasised. The formal rule can change overnight. However, the informal rules as customs, traditions, and codes of behaviour are much more difficult to change. “Although formal rules may change overnight as the result of political or judicial decisions, informal constrains embodied in customs, traditions and codes of conduct are much more impervious to deliberate policies” (North 1990 p.6). “Changes in the rules used to order action at one level occur within a currently
“fixed” set of rules at a deeper level, changes in deeper-level rules usually are more difficult and more costly to accomplish, thus increasing the stability of mutual expectations among individuals interacting according to a set of rules” (Ostrom 1990, p.52). The importance of informal institutions as a key element in understanding of studied phenomena is emphasised also by Jütting (2003). It is nowadays commonly accepted that formal and informal institutions should be seen as complementary. Informal institutions can build the background for introducing formal rules (Brautigam 1998). Platteau (2002) comes to the conclusion that in certain circumstances the informal institutions reduce transaction costs, secure more equal distribution of land access and are also widely recognised and accepted.
The same line is followed by Needham & Louw (2006) who defined the institutions with respect to land market. They referred to the institutions in the North sense (distinguishing between rules and actors) and include:
“…formal rules as the legal definitions of rights in landed property and how those are protected, requirements for registering property, taxes on property and on property transfers, restrictions on the use of land imposed by planning and other laws, rules for compulsory purchase and the compensation that has to be paid. There are also informal
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institutions in the land market, such as the weight that is given to unwritten agreements, the expectations about the part played by public and private organisations, trust and how that affects the use of networks. The intangibility of that which is exchanged in land markets (namely property rights), the high monetary value of those rights, and the great significance of land for individuals and their society, mean that institutions are particularly important for land markets.”
Therefore institutionalism sees human behaviour as driven by different kinds of rules, like habit or routine, as well as rules about the interaction in and entry to the market27. In the approach of North the organisations and persons were considered as actors (North 1990 p.7, see also Sevatdal 1999). However, the definition of institutions has been extended to include also organisational entities, procedural devices, and regulatory frameworks (Van der Krabben, 1995, Williamson, 2000) and also markets (Hodgson, 2004 p.44).
It is useful to summarise the first part of the discussion by presenting an overview of the various ways in which institutions can be understood (Table 1.). For instance Jütting (2003) regrouped ways of classifying institutions into three approaches depending on: the degree of formality, different levels of hierarchy, and the area of analysis.
Table. 1. Classification of institutions. Source: Author’s presentation of various ways of classifying institutions based on Jütting (2003)
The degree of formality Formal Constitutions, laws,
property rights, charters,
27 In the heart of the institutionalist conception of social life is the Giddens’s theory of structuration (see Healey, 1997, p.47)
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The area of analysis Economic institutions Rules related to production, allocation and
Social institutions Rules related to health and education and social security arrangements
A first alternative to classifying institutions is to distinguish between formal and informal rules and constraints. A second alternative of classification is based on ideas of Williamson
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(2000), who proposed that classification is based on different levels of hierarchy. He described institutions related to the social structure of the society (level 1), institutions related to the rules of the game (level 2), institutions related to the play of the game (level 3) and institutions related to the allocation mechanisms (level 4). It is assumed that different levels are interconnected in such a way that the higher-level institutions impose constraints on the lower levels, on the other hand the lower level institutions in turn exert a certain influence on the higher levels. This definition is consistent with the point of view of Ostrom (1990). The various channels of influence are however not always clear. First level institutions are seen as exogenous to the economic system. This means that they are coming from outside an economic system. Second level institutions, which contain mostly formal institutions, define and enforce property rights. Third level institutions relate to governance. The fourth level of institutions determines the resource allocation mechanisms. Institutions from the levels 2 to 4 are usually endogenous to the economic system, generated therefore within the system.
Jütting (2003) pointed out that “while endogenous institutions can be changed within a relative short time span, the change of exogenous institutions like informal rules, social norms, and customs might take a very long time or is even impossible”. The third way of classifying institutions takes into consideration various areas of analysis. (Jütting 2003)28
2.2 Institutional models. Different approaches to the study of institutions in property research
‘The institution matter’, but what is the role of institutions in development outcome? In general international debate on development, the empirical study on the impact of institutions on the development outcome (measured for example in growth rates) proves a strong positive correlation between quality of institutions and development outcome29. In the literature of the 1990s concerning cross-country studies, institutional quality was measured by variables such as political violence and civil liberties. Recently, institutional measures refer to the risk of expropriation, degree of corruption, quality of bureaucracy and strength of the rule of law.
(Jütting 2003)
In the general development debate there is a lack of precise indicators to measure the impact of institutions on the development outcome and the evidence of causation. This was emphasized, for example, by Chang (2006) in relation to the property rights system:
“Giving the impossibility of aggregating all elements of a property rights system into a single measurable indicator, empirical studies tend to rely on subjective measures of the overall ‘quality’ of the overall property rights system. Many rely on surveys among (especially foreign) businessman, ‘experts’ (e.g. academic, chief economists of main banks and firms, etc.), or even the general public, asking them how they assess the business environment in general, and the quality of property rights institutions in particular (…) these kinds of measures are very problematic”.
28 Jütting (2003) argues that the second alternative of classifying institutions is a better way to understand institutional changes and the impact of institutions on outcome.
29 This finding is based mainly on the cross-country studies. However, there is still a critique concerning the conceptual problems and the evidence of causation. There are also other factors like geography and trade that are taken into consideration vis-à-vis institutions (see for instance Sachs 2003).
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In studies of institutions in land and property market, an impact of the institutional and regulatory environment on land and property market and processes have been confirmed by several researchers (e.g. Haila 1990, Van der Krabben, 1995, Kauko 2002). Therefore, the institutional components have been added as a variable in analysis in the property research area. For example Kauko (2002) incorporated institutional (as well as behavioural and cultural) aspects into the conceptual urban property value model. In this way he extended his framework of analysis beyond the neoclassical economic assumption. However, there are also conceptual problems concerning the scope and definition of institutions as well as evidence of causation. Several different approaches to study institutions in relation to land and property market were proposed (see for instance the review of institutional approaches of Ball 1998).
Attention to process which changes the urban spatial structure was first paid by Ball (1986) and Healey and Barret (1990). Earlier models conceptualise the property development process and theorise the relation between the groups of actors that are involved in this process. The attention was directed towards research agenda, consisting of four themes of inquiry:
(1) The review of the changing forms of capital flow into and out of the built environment requires an understanding of the diverse sources of capital, the different ways capital can be invested in property and the place of property in the investment strategies of different kinds of firms.
(2) The changing composition and strategies of the firms involved in the development and redevelopment of the built environment need to be explored. The emphasis would be on the way changing strategies reconstitute the interests firms have in land, property and property redevelopment and the way these interests find reflection in the negotiative practises through which action is undertaken
(3) The various ways in which the state impinges on these changing practices, in relation to the tools of intervention employed, the way in which these affect the demand for space, the rules within which individual firms develop their strategies, and the forms of development process, should be examined.
(4) Research must be directed to an assessment of the implication of the above processes for local economies in terms of capital flows, labour market demand and supply, building materials and land, the impact on land and property values, and the implications of changes for these, the resultant social, economic and environmental externality costs and benefits within local economies and the distribution of these.
(Healey and Barrett, 1990, p.98-99)
Healey (1992) followed this line of argument by enumerating a number of issues that are relevant to the above themes:
(1) The significance of spatial variations: in land and property markets, development activity, in institutional relations, and the potential and actual effects of urban policy (…);
(2) The significance of temporal variation and specifically the impact of the cyclicality of property development activity (…);
(3) The interplay between changes in land and property markets, development industry relationship, and the user and investor needs and demands of the changing city (…);
(4) The distribution of costs and benefits from development activity (…);
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(5) The interplay of the specific history and geography of particular urban regions, and the effort of locally based initiatives, the localizing forces, and the globalizing tendencies of corporate conglomerates and oligopolistic relations, international political initiatives (Healey, 1992, p.10-11)
For instance, Healey (1992, p.33) in order to generalise about rules and relations involved in the property development process proposed a descriptive institutional model of the development process, which contains four levels of analysis:
(i) “a description of the events which constitute the process, and the agencies which undertake them
(ii) identification of the roles played in the process and the power relations between them
(iii) an assessment of the strategies and interests which shape these roles, and the way these are shaped by resources, rules and ideas, and
(iv) the relation between these resources, rules and ideas and the wider society”
This approach is called “structure-agency institutionalism” (Ball 1998). Structure-agency analysis pays attention to the process of land and property development by investigating the relationships between structure and agency - what drives the process and in what way individual agents develop and pursue their strategies. Structure is established by the way agents operate and is composed of various rules that govern their behaviour, and the ideas which they drawn upon in developing their strategies (Healey and Barrett 1990).
Healey’s model focuses on distinguishing levels of analysis rather than placing the analytical emphasis on typologies of actors, events and interest. This particular institutional model received some methodological criticism (see below the critic of Ball 1998). However, it was also used in property research and other authors saw it as an appropriate methodology (see for example Van der Krabben and Lambooy, 1993, Van der Krabben, 1996). In general Healey’s model is popular in the planning research field. For example recently in Finland it was used as a research approach in international comparative research of Kurunmäki (2005). There are, however, a lot of different approaches popular in the property research field.
Ball (1998) explores the differences that exist between methodological approaches to the study of institutions in the British property research. According to him, the approaches used in studying institutions range from mainstream economic theories to structure-agency approaches which are represented above in Healey’s model to power approach and structure of provision approach. The boarders between different approaches, however, are not so clear (see Tab.2).
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Table 2. Approaches to the study of institutions in British property research. Source: Author’s presentation based on Ball (1998)
Technical Production Characteristic Studies of economies of scale.
Transaction-cost Minimising Institutions and their organisational structures evolve to minimise the transaction cost associated with production and exchange
Game Theory Investing strategic behaviour in the context of predefined situations and rules of behaviour. The prisoners’
dilemma.
Information Theory Information is necessary for any economic activity, but it is also
Conflict Institutionalism Identify groups to be in conflict and their interests. Like local interest versus private developers.
Wider city and national interest is ignored in this research.
Behavioural Institutionalism Identify the behavioural characteristics of a particular type of agency – landowner, developer or financier
Structure-agency theories ASH (Agency-Structure Healey) type of research
Four level framework for analysis of Healey
Structures of provision SoP – Structures of building provision - Ball
A number of specific institutionally related theories in economics can be distinguished. They have been applied to property research, including transaction cost theory, game theory and information theory. However, according to Ball (1998) the second approach – namely the power approach to institutions, was the predominant approach, at least within British property research. First, I will discuss the various approaches, especially the most popular Healey’s institutional model of development process and then I will direct attention to the economic approach to study institutions.
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The power approach means identifying ad hoc institutional power and its consequences. The weakest approach according to Ball (1998) of the power approaches is called “general ad hoc institutional analysis” (also called “ad hoc institutionalism”). Within such an approach “there is no clear theory of institutions and how to study them, rather elements are drawn together in ad hoc explanations”. The action of individuals is also emphasised over markets. Another type of research called by Ball “conflict institutionalism” focuses on conflict studies between public and private parties involved in the process, mainly local community and private developers. In turn “behavioural institutionalism” identifies the behavioural characteristics of a particular type of agency. Agency is a term understood for example as landowner, developer or financier. The “structure-agency institutionalism” type of research, as criticized by Ball is not different from the ad hoc institutionalism. Critics are concerned by the lack of definition, what really constitutes the structure, agency or institutions and the relevance in the local practical context (Ball 1998). The structure of building provision approach30 “refers to the contemporary network of relationships associated with the provision of particular types of building at specific points in time. Those relationships are embodied within the organisations associated with that type of building provision, and they may take a market or a non-market form. Provision encompasses the whole gamut of development, construction, ownership and use” (Ball 1998). The difference between this approach and the approach proposed by Healey (1992) lies in the understanding of structure. In Ball’s approach, the organisation and markets are included in the structure of building provision because of the mutual influence on each other. The other elements are constraints and rules under which they operate. All these elements together with historically specific institutional and other social relations create unique structures of provision (SoP). Several SoPs may also exist for one type of building provision at certain moments of time. This according to Ball provides an understanding of
The power approach means identifying ad hoc institutional power and its consequences. The weakest approach according to Ball (1998) of the power approaches is called “general ad hoc institutional analysis” (also called “ad hoc institutionalism”). Within such an approach “there is no clear theory of institutions and how to study them, rather elements are drawn together in ad hoc explanations”. The action of individuals is also emphasised over markets. Another type of research called by Ball “conflict institutionalism” focuses on conflict studies between public and private parties involved in the process, mainly local community and private developers. In turn “behavioural institutionalism” identifies the behavioural characteristics of a particular type of agency. Agency is a term understood for example as landowner, developer or financier. The “structure-agency institutionalism” type of research, as criticized by Ball is not different from the ad hoc institutionalism. Critics are concerned by the lack of definition, what really constitutes the structure, agency or institutions and the relevance in the local practical context (Ball 1998). The structure of building provision approach30 “refers to the contemporary network of relationships associated with the provision of particular types of building at specific points in time. Those relationships are embodied within the organisations associated with that type of building provision, and they may take a market or a non-market form. Provision encompasses the whole gamut of development, construction, ownership and use” (Ball 1998). The difference between this approach and the approach proposed by Healey (1992) lies in the understanding of structure. In Ball’s approach, the organisation and markets are included in the structure of building provision because of the mutual influence on each other. The other elements are constraints and rules under which they operate. All these elements together with historically specific institutional and other social relations create unique structures of provision (SoP). Several SoPs may also exist for one type of building provision at certain moments of time. This according to Ball provides an understanding of