Understanding How Land is Exchanged: Co-ordination Mechanisms and Transaction Costs

Abstract

This paper seeks to increase our understanding of how land is exchanged between suppliers and demanders. Most current land-price theories, and the land-use models which are derived from them, assume that co-ordination between suppliers and demanders is achieved through the price mechanism. There are, however, other possible co-ordination mechanisms, including imposed rules and mutual trust. In order to take account of these, the effect of institutions has to be included in the theories. Transaction cost economics, as one strand of institutional economics, seeks to explain which co-ordination mechanism is chosen in practice. In this paper, the application of these ideas is illustrated with findings from a detailed survey of how Dutch housing associations acquire land. It appears that these housing associations choose to acquire land through the mechanism of mutual trust when there is a network in place which they can use, and to acquire through the market when that mechanism is not available. This application shows how the theoretical ideas can be operationalised and tested in practice. If this were done more widely, the assumption that price is the main co-ordination mechanism could be tested critically. The outcome would be important not only for land-price theory, but also for land-use policy.