Cooperation between competitors leads to more efficient urban development

  • Anders Eika
    Foto
    Private

Using an innovative blend of managerial sciences, welfare economics, game theory and behavioural economics, Anders Eika analysed how property developers cooperate in Norway, and the factors that help and hinder such cooperation.

Cooperation between competitors leads to more efficient urban development

Various firms often work alongside each other to develop property into housing, offices, cafes, shops and so on. These property developers have a common interest in making a neighbourhood in which it is easy to sell and rent out property at high prices.

Although they are competitors, they are positive to cooperate to increase the value of their shared neighbourhood. Difficulties can arise when different development parties are interested in minimising risk and retaining as much control as possible over their own projects.

This research looks at how property developers cooperate in Norway, and what helps and hinders cooperation. 

Eika studied the social relations between developers and the factors that influence their decisions in situations where it is difficult to calculate the outcomes, asking:  i) To what extent do firms developing urban land in the same area voluntarily cooperate in praxis? ii) How do decision-makers’ heuristics and biases influence the extent to which developers cooperate with one another? and iii) How does the social and cultural basis for cooperation in Norway differ from other countries?

Complex processes involving many actors

Redevelopment is important for sustainable urban growth - but it is difficult. Plots are expensive and there are complex processes involving many actors, making it hard for a single company to redevelop a large area. 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.

Ensjø, Oslo: A typical urban development area with multiple developers present.
Foto
Oslo Agency for Planning and Building Services/plan- og bygnignsetaten.

Common interest

Developers have a common interest in making a marketable neighbourhood. When developers invest in attractive elements such as good public spaces and architecture, they create positive spillovers for one another.

Cooperation can be achieved if those that benefit from a firm’s spillovers compensate the provider, or if multiple firms make these investments jointly. When marketing a new neighbourhood in a redevelopment area, for example, developers could compensate those investing in marketing, or run joint marketing schemes.

Decisions on whether to cooperate with competitors are complex, and it is often impossible to calculate an optimal strategy. In these cases, decision-makers will often resort to heuristics and biases. By changing details in the scenario, Eika investigated how the specifics of the situation affect the propensity for cooperation and traits that influence cooperation, such as trust and fairness.

Norwegian developers more likely to cooperate

Eika compared results from Norwegian game experiments to results from similar Belgian, Dutch, and English experiments. The results indicate that Norwegian developers are more prone to cooperation than Dutch and particularly Belgian developers.  This reflects the fact that Norwegian redevelopment is largely market-driven, and the firms have the opportunity to design their projects in liaison with each other.

Few examples of cooperation 

While developers are positive to cooperation with their competitors, the research found few substantial examples. Firms are not willing to change their timelines or budgets to accommodate cooperation. Cooperation is therefore largely related to actions that do not incur additional costs, such as exchanging information or making joint investments if they would have to make these investments anyway.

Innovative approach

While there is a lot of literature on cooperation between competitors in other fields and for other industries, it is hardly studied in the development industry. This research uses an innovative blend of managerial sciences, welfare economics, game theory and behavioural economics to analyse urban and property development. 

Cooperation leads to more efficient urban development

The research concludes that greater degrees of cooperation between developers in redevelopment areas would lead to projects that are more efficient. Municipalities should set the pace in redevelopment areas, and assume a role in organising such cooperation.

These findings provide a step towards improved cities and more efficient urban development, whilst presenting a new and exciting way to combine economics and psychology with urban development.  

The research was supported by the Norwegian State Housing Bank (Husbanken)

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Anders Eika will defend his thesis Cooperation and competition in urban redevelopment on 12 June at NMBU's Festsalen and via Zoom. See the event page for details.                          

 

Published 3. juni 2020 - 12:14 - Updated 3. juni 2020 - 15:12