Urban Congestion and Developer Precommitments: Unilateral Solutions to Dynamic Inconsistency

The sale of housing creates a dynamic inconsistency problem for residential developers, who find it profit-maximising to overdevelop an area once ownership of the existing housing stock has been transferred to local residents. Rational buyers lower the prices they are willing to pay in expectation of this future congestion. It is therefore in the developers' interest to attract higher prices by credibly precommitting themselves, unilaterally, to construction plans that are optimal for each housing tract. If the externalities associated with congestion affect quality of life in neighbouring tracts, however, development will still exceed the efficient level. The introduction of master-planned communities, where a single development company commits future developer/ builders to a plan for the construction of multiple, contiguous housing tracts, can create the expectation of future population densities that will be optimal on a city-wide level.