The Blight of Hyper-Empowered Local Government

Lydia DePillis has a fascinating piece in the City Paper about why developers cluster their projects in specific neighborhoods. A lot of it just seems like basic good business sense, but some of it is an adaptation to regulatory dysfunction:

Developers who go big in a certain neighborhood follow a certain calculus. One major factor: D.C.’s ultra-empowered Advisory Neighborhood Commission system. While these hyperlocal bodies can’t directly kill a project, they can certainly slow it down. In a business where investors get spooked when things drag on too long, that’s often the same thing—which is why a long record of working with the locals is especially helpful. “The more time it takes to do anything, potentially the worse off the developer is,” says Calvin Gladney, of the development consulting group Mosaic Urban Partners. “You have to get the ANC to weigh in, so the more you can leverage previous relationships, the better.” […]

ANCs can leverage concessions from large landowners, knowing that the company will have to come back looking for support for their next project. In Shaw, for instance, Douglas Development scatters tens of thousands of dollars every year in donations to local organizations, like a manor lord might spread charitable donations around the adjacent village.

If you look at this in a partial equilibrium framework, it may sound nice. The developer-ANC interaction is iterated, so the developers play nice with the ANCs, and that boosts allocations to local organizations.

But a big problem comes in the “investors get spooked” phase. The spookiness of investing in DC means the cost of capital is higher than it would otherwise be and the total quantity of investment is lower. That’s good for incumbent landlords, and it also particularly disadvantages potential start-up firms which helps shelter large developers from competition. What’s more, the ANC uncertainty factors also deters outside firms from coming into the city with projects, thus further sheltering DC’s developers from competition. The upshot is that while I think ANC members think they’re being “tough on developers,” a large amount of what they’re doing is creating monopoly rents for developers and then very partially splitting the proceeds with neighborhood nonprofits.