Cooperation and competition in urban redevelopment
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This thesis presents new knowledge about cooperation between firms developing industrial, logistical, and similar land into housing and service providers. Such redevelopment is important for sustainable urban growth, but it is difficult. Plots are expensive, and there are complex processes involving many stakeholders. This makes it difficult for a single development firm to redevelop a large area. However, once one firm redevelops a part of an area, the market potential for redeveloping other parts of the area increases. There thus tends to be multiple developers active in each large redevelopment area. These developers have a common interest in making a sellable neighbourhood. If they build cheap, dense, and tall structures that cut off views and sunlight they can produce more units at lower prices, but it becomes harder to sell or rent out their products. This creates a negative spillover effect, or externality, for other developers in the area, as it depreciates the value of their projects as well. There is much literature on such negative externalities in urban development, but this thesis deals mainly with the less studied positive externalities. Developers create these positive externalities for neighbouring developers when they invest in benefits such as good public spaces, architecture, and marketing of the redevelopment area. In isolation, a developer will only invest additional resources in such goods if it provides them with higher expected revenue, in the form of sales prices or quicker sales, than their expected costs. However, for each such investment a firm makes, positive externalities are created for all the other firms, and this is the case for all the firms involved. In such a situation, there will tend to be an under-provision of the benefits. If one developer spent more resources, the benefit for all developers in sum would be greater than the cost. The developers have a common interest in cooperating, as this would lead to each firm investing more than if they only considered their own preference in isolation. Such cooperation can be achieved if those that benefit from a firm’s externalities compensate the provider, or if multiple firms make these investments jointly. For instance, when marketing a new neighbourhood in a redevelopment area, developers could compensate those investing in marketing, or plan joint marketing schemes. Developers might also have an interest in other types of cooperation, such as constructing infrastructure around their projects together to achieve economies of scale. However, these developers are competitors, which might make cooperation difficult. Economic literature sometimes uses the portmanteau ‘coopetition’ to denote such cooperation with competitors. This notion can be studied from many different angles, both as an aspect of cooperation in general, and specifically as an economic strategy employed by firms. This thesis relates to literature on cooperation from managerial sciences, welfare economics, game theory, and behavioural economics, in additional to general literature on property development in redevelopment areas. Decisions on whether to cooperate with competitors are complex, and it is rarely possible to calculate an optimal strategy. Decision-makers often resort to heuristics and biases. The empirical material in this thesis is therefore largely based on economic experiments. Property developers and others from related fields have played simple games, in order to analyse how heuristics and biases influence coopetition strategies among development firms. These games present a scenario and the subjects must make a decision. By changing details in the scenario, the thesis investigates how the specifics of the situation affect the propensity for cooperation and other traits that influence cooperation: risk preferences, trust, and the notion of distributive fairness. The thesis also compares results from the Norwegian game experiments to results from Belgian, Dutch, and English experiments. Furthermore, to compare results of experimental data with those of the real world and learn more about strategies and actual instances of coopetition, the thesis analyses interviews with 13 project managers in redevelopment areas in Oslo, Norway. The thesis investigates three research questions: To what extent do firms developing urban land in the same area voluntarily cooperate in praxis? How do decision-makers’ heuristics and biases influence the extent to which developers cooperate with one another? How does the social and cultural basis for cooperation in Norway differ from other countries? The thesis finds that developers are positive to coopetition, however, coopetition is uncommon. It is not in itself a problem for firms to cooperate with competitors, but they are not willing to change their timelines or budgets to accommodate cooperation. Therefore, the observed cooperation is largely related to things that do not incur additional costs, such as exchanging information or making joint investments if they would have to make these investments anyway. The games indicate that developers are fundamentally positive to cooperation, but less positive in situations with greater uncertainty or if the parties have unequal power in the cooperation scheme. Norwegian developers are also more prone to cooperation than Dutch and particularly Belgian developers are. This reflects that Norwegian redevelopment firms have a tradition for interacting with one another, as property development is largely market-driven. The firms have a wide range of opportunities for designing their projects and interacting with one another. The main contribution of the thesis is to study cooperation between competing developers when the municipality does not mandate such cooperation. While there is a large literature on coopetition in other fields and for other industries, it is hardly studied in the development industry. Literature on cooperation in property development largely relates to cooperation between the public and the private, or between firms from different parts of the value chain such as between developers, landowners, construction firms or investor groups. There is also some literature on joint ventures between developers, and situations where the public mandates participation on joint projects. However, these lack the tension of deciding on whether to cooperate with a competitor. The thesis is also methodologically innovative: while scholars have previously used game theory and behavioural economics to analyse urban development and property development, examples are rare, and the thesis contributes to expanding this field. The thesis concludes that greater degrees of cooperation between developers in redevelopment areas would lead to projects that are more efficient. The reasons for the scarcity of real-world cooperation indicate that municipalities should set the pace in redevelopment areas, and assume a role in organising such cooperation. Particularly where multiple developers are working side by side the municipality should organise redevelopment processes.Denne oppgaven gir ny kunnskap om samarbeid mellom eiendomsutviklere i områder der fabrikker, varedeponier og lignende blir transformert til boliger, kontorer og tjenesteytere. Slik bytransformasjon er viktig for god og bærekraftig utvikling, men det er vanskelig. Tomtene er dyre, og det er kompliserte prosesser med mange involverte aktører. Dette gjør det vanskelig for én enkelt eiendomsutvikler å transformere et stort område av gangen, men etter hvert som én del transformeres øker markedsinteressen for å transformere også resten av området. Det er derfor ofte mange utviklere involvert i hvert område.