Tradable Planning Permits to Control Land Development in Germany: A Laboratory Testbed Experiment

Abstract

This article reports on the results of a market experiment with a trading system, where several municipalities in Germany were obliged to submit ‘planning permits’ for land development outside existing planning boundaries. This study was motivated by current literature proposals for the design of a nationwide permit scheme and tests this market-based policy with 11 communities in the Hanover Region. Subjects were equipped with specific field data about future building areas and their fiscal impact on community budgets for the period 2010–2024. The experiment consisted of two sessions, the first with urban planners and the second with students. The researchers set a proposed regulatory target and varied the initial allocation method for permits across two treatments. Prior to trading, permits were periodically allocated via grandfathering or increasingly substituted by auctions. Results show that a permit scheme could realize substantial cost savings compared with alternative command and control standards, even under market power (MP) conditions. Market efficiency and gains from trade were lower in the planner session. The substitution of permit auctioning for grandfathering did not lead to significant differences in price development, MP and efficiency.

Keywords:

• Land development
• land-use control
• testbed experiments
• tradable permit systems
• fiscal impact analysis

Acknowledgements

The author wishes to thank two anonymous reviewers and Martin Breßlein and Nils Wittig for their support in organizing and running the experiments.

Notes

Barsinghausen, Gehrden, City of Hanover, Hemmingen, Isernhagen, Laatzen, Lehrte, Neustadt am Ruebenberge, Sehnde, Springe and Wedemark. The survey was conducted in summer 2009. These municipalities represent 73% of the population (0.82 out of 1.139 million) and 61% of the total area (1296 out of 2291 km2) of 21 municipalities in the Hanover Region. The questions about future development areas were all answered by the same persons who took part in the experiment (for the characteristics of the representatives, see footnote 5).

The data were sourced from the Landesbetrieb für Statistik und Kommunikationstech-nologie Niedersachsen (LSKN). When comparing past land development as derived from official statistical data with future development, it should be noted that our survey does not include ‘high-level’ development for transportation, initiated at the regional or national level. However, this type of development applies to only a fraction of the overall land use.

Calculations are based on a study by Köller and Henger (2010), who estimate the fiscal impact of new building areas on municipal budgets and calculate revenues by multiplying current tax rates (period 2003–2007) by expected changes in the tax base (per capita multiplier method) and their subsequent impact on payments of the municipal fiscal equalization system in Germany.

Detailed values as well as the the sizes of the areas which indicate the number of permits required for developing an area in the experiment are summarized in Henger (2010).

The experiment was programmed and conducted using the University of Zurich z-tree programme (Fischbacher, 2007). The planner session took place in Hanover, the student session in Goettingen. Seven municipalities were represented by the heads of their planning department, one by a member of the planning department staff. Three further municipalities were each represented by two people: one by an urban planner and clerk, a second by two planners from two sub-departments, and a third by an urban planner and the treasurer.

Experimental methods in field, laboratory and testbed experiments are discussed in Plott (1994), Harrison & List (2004) and List (2006).

Sturm (2008) and Ostertag et al. (2010) did not observe significant differences between the commonly used neutral framing and the ‘environmental’ framing.

No reserve or ceiling prices were set as safety valves. Cf. e.g. Hepburn et al. (2006) for alternative auction designs.

In initially allocating permits to the municipalities, we took account of the fact that our experiment was restricted to residential, mixed and commercial/industrial areas by subtracting the planned public areas surveyed from the permit budget of each municipality. We also reduced the number of permits allocated to the principal community, since a regulatory authority would have to keep a number of permits in reserve to be given to higher levels of government for the development of, for example, roads and other transport infrastructure.

More precisely, the market situation bears the characteristics of an oligopoly, with outcomes that can differ from monopoly predictions (e.g. Cournot competition). However, as the strongest form of market power, a monopoly is used as a helpful reference point for the purpose of our study (cf. Cason et al., 2003).

Including instruction time and training periods the sessions lasted about four hours, during which the students earned an average of €39.30 each.

If all subjects had redeemed their final permit holdings to develop their building areas, efficiency and gains from trade would have been higher. The ‘potential’ efficiency gains are larger with students than planners and lead to greater differences across both subject pools (Table 5).

The planner session ended with a questionnaire. According to the participants, their trade and development decisions were based on the six criteria ranked as follows: 1. fiscal impacts, 2. urban planning, 3. local political interest, 4. development reserves within existing planning boundaries, 5. cost-shifting potentials and demand conditions and 6. spatial planning.