For the greater good: the game theory of zoning

A question I hear a lot is: "Why do NIMBY homeowners support zoning laws? Isn't it in their best interest to allow for the highest and best use so that they can sell their own property for the maximum price? Don't they want freedom to do as they please with their land?" At a first level, this analysis is correct. Homeowners do want to have complete freedom to build whatever they want on their own property (or to sell to someone who will). We'll call this the Individualist perspective.

However, the calculus changes once you zoom out and consider the neighborhood as a whole. The utility for a particular homeowner becomes dominated by the actions of their neighbors rather than their own. To be precise:

Imagine you live in a suburban neighborhood with many single-family homes. There are 10 lots on the block, and 1 of them gets sold to a developer who bulldozes the small house and replaces it with a massive apartment complex. The 1 guy who sold to the developer is happy because he's just made a bunch of money, but the other 9 families now have to deal with the construction, a big change in the physical design of the neighborhood, and a change in the kind and number of neighbors they have. They aren't guaranteed to dislike it, but this big change invites a risk to their way of life. Since each owner has more neighbors than lots to sell, each one is more likely to be on the losing side of that deal than on the winning side. As a result, they are willing to sacrifice some freedom in what they do (or what their buyer does) with the lot in order to buy the control of their neighbors' behavior.

Put more generally: in any given year each homeowner is unlikely to sell, but it's very likely that someone in their neighborhood will sell. Each owner has n-1 neighbors and there's only 1 of themselves, so summing up all their individual small likelihoods of selling produces a much higher likelihood that the community will change in a way unwanted by that neighbor.

With this perspective, the rational thing to do is work together to add tighter zoning restrictions in order to curtail damaging behavior by your neighbors. We'll call this the Localist perspective.

There will always be a few owners who are more interested in doing something controversial with their property than with maintaining the status quo, so it's not quite as simple as saying that all neighbors will suddenly work together in the interest of the overall neighborhood. In any given neighborhood there's a mix of Individualists and Localists, and the ratio varies from place to place.

In many communities across the US, the Localists have won out. Although adding restrictions via zoning laws is slightly worse for each owner in isolation, it restrains them each from behaving in ways that erodes much more welfare for all the others, and they're more likely to find themselves on the raw end of the deal than not. The result: neighbors self-organize to constrain everyone's behavior for the greater good of the community. In other words, restrictive zoning laws that retard development are a good thing! Right? Not so fast...

Let's zoom out one more time and look at neighborhoods as our base unit of analysis, rather than the individuals that constitute a neighborhood. Growth and change are important for the health of a region's economy, so it's important that there's space for development as a whole, despite inconvenience in the short term. Development grows the size of the economic pie for everyone in the long run. This raises another question I hear a lot: "If development increases the value in a region in the long-run, why don't homeowners support it? Doesn't this increase their property values?"

This is a good question! This growing pie narrative does seem to contradict the common pro-housing criticism that "NIMBYs" are just selfishly protecting their home values. This contradiction can be resolved if we consider the vast differences between (a) long- vs short-term ramifications and (b) communal vs personal ramifications.

In the long-term, yes, good development will improve a region’s lot, and the community will be better off overall. However in the short-term, development may disrupt daily life, and gains will not be distributed equally throughout that region. As a concrete example: say development means building a new fire station. The region as a whole benefits—more fire safety!—but the next-door neighbors will suffer from the sirens going off day and night. It's important to not overlook the local, short-term costs that individuals might bear in lieu of whatever global, long-term benefits might exist.

Those costs are the ones borne by individual homeowners, the ones that mean each neighborhood will tend to internally cooperate to retard local development. A region may benefit overall from development, but a region is made up of neighborhoods, and none of them wants to bear the brunt of that change.

Again to be precise:

To resolve this problem, neighborhoods have to cooperate with each other. We'll call the folks who advocate this kind of inter-neighborhood cooperation Regionalists. Ironically their goals look quite a bit for what the Individualists pushed for all along: allow for development. The difference is that this time we'll punish those neighborhoods that "collude" to restrict it. This time the tension isn't Individualists vs Localists but rather Localists vs Regionalists.

Interesting dynamics to note here:

In conversations about housing, Regionalists tend to condemn the Localists as selfish and uncooperative, when it's really more of a question of what level of analysis you're looking at. These Localists are focused at the level of their local community and see their actions as maximizing the value for everyone in it; critics focus on a zoom level up and see that this local behavior creates global problems for the system. Both levels of analysis are correct. The challenge is determining which one should overrule the other, and under what circumstances.

This muddies some of the rhetoric both pro- and anti-housing advocates use:

I tend to be much more of a Regionalist (or sometimes an Individualist) than a Localist. However I do sympathize with the dilemma that the Localists face. Their home is where they live, where they raised their kids, and in most cases their single biggest asset. This of course does not give them a free pass. But rather than demonize them as selfish or irrational, it's important to understand where they're coming from.