Transaction Costs

In order to understand why Gurgaon failed to provide centralized or coordinated solutions to utilities and services we will have to examine the role of transaction costs.  First off as we know Gurgaon had no municipal body and was developed primarily by private hegemonic entities.  These entities planned and built both commercial and residential districts which eventually attracted large multinational corporations to invest in the region.  From the results it is clear private developers don’t have many incentives to cooperate.  Further as they are building their developments they begin to create a web of property rights which don’t necessarily align with natural pathways for utilities.  Building a highway a major city requires massive amounts of reshuffling of property rights.  Actors have incentives to hold out due to the knowledge of that the project can’t proceed without the purchase of their property.  Private companies don’t have the advantage of eminent domain either. Even if some company wanted to build a water system which could serve the entire city the negotiations alone would threaten the project.  It is for this reason that infrastructure is much cheaper, and therefore more likely to be built if it is planned and built in advance.

“Compare Gurgaon’s development with that of New York. In 1807, at a time when only the southern tip of Manhattan was urbanized and the population of New York City was just 85,000, the Common Council of the City of New York created a commission that laid out roads and public squares for the entire island (Angel, 2012). The commissioners planned for a sevenfold expansion, an expansion that would not occur for many decades (the population of the planned area would eventually number over two million). When Manhattan did expand, however, public rights of way for streets, sewers, parks, and other urban infrastructure had already been provided for, greatly reducing the cost of expansion. In essence, the Common Council planned the future rules of the game behind a ‘veil of uncertainty’ that gave them stronger incentives to plan for efficiency and the common good. Once the veil is lifted, however, the constitutional moment is lost (Buchanan and Tullock, [1962] 1999).” Lessons from Gurgaon

Is Manhattan perfect? No, but it certainly is doing better than Gurgaon.  A great deal of the difference is due to the orders of magnitude delta in wealth and different fauna.  Yet it is clear though that Manhattan could have easily been hamstrung by poor coordination halting its natural expansion.  As wealthy (per capita) as Gurgaon is even relative to Delhi it cannot post facto plan its development.  Pre-planning lowers transaction costs and creates predictable development.  Predictable development helps coordination and planning.

There is a cost to using the market, the higher the number of actors the higher the cost.  Building highway through a city is not speculation (though it may not be profitable).  It is obvious to everybody that it will implicitly increase property values around the highway.  It is also obvious that any one actor could hold up the entire process by defecting and essentially using blackmail.

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