Research Matters: Lee Fennell on "Agglomerama"
Research Matters is a regular feature in which a member of the faculty talks about some of his or her latest work and its impact and relevance to law and society.
Professor Lee Fennell wrote “Agglomerama” for the 2014 BYU Law Review Symposium on the Global Commons. In this paper, she examines how to achieve the benefits of proximity among firms and households while curbing the negative effects.
Q. Why did you write this paper?
A. I was invited to participate in a symposium on the Global Commons last winter at Brigham Young University Law School. I knew I wanted to do something about agglomeration in cities. I am interested in spillovers in urban areas and how the land use and location choices people make influence how well cities are going to be able to perform, and how much value they’re going to be able to generate.
Q. Has this become more important as we’ve become a more urbanized society?
A. Absolutely. We’ve passed the halfway mark globally in terms of how many people are living in cities. Here in the U.S., 80.7 percent of the population now lives in urban areas.
Q. The paper addresses the tension between maximizing the benefits of agglomeration — the knowledge spillover, reduction in transportation costs, labor-market matching — with the negatives. What are the key challenges to assembling the optimal mix of participants to achieve this?
A. The paper focuses on heterogeneity among different actors — firms or households — that are choosing where to locate. Not everybody is equally positioned to generate the same kinds of spillovers. Putting together the right mix can have these really good synergistic benefits, but putting together the wrong mix can dull or dampen the benefits or even create negative synergies. Figuring out how to deal with that heterogeneity is really tricky for traditional land-use policy because tools like zoning tend to promote homogeneity within a particular area. Maybe what we want is the vibrancy of having a lot of different things put together, but then you have to think about how to manage that mix. One of the biggest challenges in this context is information —who has sufficient information to make the right judgment calls about what uses are complementary? We’re used to using markets to assemble information, but we can’t fully rely on them here.
Q. Why can’t we rely on markets to achieve the right mix?
A. Because of all the spillovers that are involved. Any firm or household that is deciding where to locate wants to position itself to absorb positive spillovers from its neighbors, but it is not going to be sensitive to the spillovers it produces — whether it is contributing enough, whether it’s generating negative spillovers. The market can price in the benefits and costs that go along with a particular location, but it doesn’t factor in the contributions of the one who is choosing that location.
Q. To what extent is an actor’s ability to contribute energy or clog influenced by its interaction with neighboring actors?
A. That interaction is key. When it comes to energy or clog — these are the words I use to describe the positive and negative contributions — it’s not as if actors have a fixed amount they’re going to contribute under all circumstances. It depends on that actor’s interactions with the neighbors. Some scholars have focused on an optimistic story that I think is sometimes true: When some actors choose a location because of spillovers they are going to enjoy, their choice is closely correlated with their ability to reciprocally contribute to their new neighbors. For instance, tech firms may not be in a position to enjoy the spillovers of neighboring tech firms unless they’ve made themselves receptive by undertaking things that are also going to produce spillovers. But there may be many other contexts where actors can enjoy spillovers without contributing much.
Q. What are some of the most realistic strategies for assembling the optimal mix of participants?
A. There are some existing models that might be adapted. For example, some scholars have recently suggested making cities work more like shopping malls, where a single owner figures out how to assemble a set of complementary tenants and prices their respective leases to reflect the spillovers they generate for each other. But there can be downsides to concentrating ownership in that way — we might not want one entity to own a significant chunk of a city’s downtown, for example.
Another approach would be to somehow compensate entities that are bringing a lot to the table and charge more to those who bring less. Local governments can essentially impose different prices on different parties, whether through tax breaks, subsidies, or deals with developers. But governments may not have the right information to figure out what’s really going to work well. There’s also a doctrinal challenge — the U.S. Supreme Court has put limits on the ways in which governments can make deals with developers.
Zoning might also be changed to expressly take account of the amount of energy or clog that different actors generate. For example, performance zoning is an alternative to traditional zoning that focuses on impacts rather than uses. If we can identify elements that contribute to positive spillovers—foot traffic patterns, or numbers of on-site workers—those impacts could be the focus of performance standards applied to those who locate in a particular area. A more far-reaching approach, which I plan to explore further in future work, would involve changing the nature of urban property holdings themselves to make it easier to change things around within cities when conditions change.
Q. Why does this issue matter?
A. The value of property these days is increasingly determined by what is nearby and not just by what is happening on the owner’s individual parcel. When the primary way that a piece of real estate generates value is through its interactions with neighboring pieces of real estate, it becomes essential to focus on how to manage those interactions.