Abstract
This paper adopts a game‐theoretic Nash equilibrium approach to examine the issue of planning flexibility in terms of land use zoning and development by appealing to the ‘white sites’ programme in Singapore as a natural experiment. The key insight is that the existence of competing white sites diminish the potential profit‐maximizing supply. While the flexibility in land use is valuable, it potentially introduces a supply inefficiency through the uncertainty embedded in the development decision ‐ making process. In addition, it is never optimal to defer development when competing white sites exist and when demand stays unchanged, unless exogeneous factors constrain commencement of construction. It is further demonstrated that a first‐mover advantage exists such that subsequent white sites released shortly after the first white site are likely to fetch lower land prices. Nevertheless, the land price would still reflect the alternative land use value. The predictions of our model are consistent with an empirical case study of proximate white sites.
Acknowledgements
We wish to thank Poh Har Neo for excellent research assistance and the anonymous referees for their excellent comments and suggestions. We also thank Bryan MacGregor for helpful comments and inputs.
Notes
Although no development premium is payable for white sites, the premium should be reflected ex ante in the land price. Earlier work by Sing et al. (Citation2002) deals with the value of this price differential.
An alternative scenario is to hold on to the completed development for investment reasons. If so, the postulated model can be modified to reflect rental income instead of price revenue. For purpose of this analysis, the price revenue can be viewed as capitalized rental income, appropriately adjusted for vacancy and operating costs.
Location parameters are not incorporated in the model since the focus of the analysis is on competing sites in close proximity.
The analysis that follows assumes an interior solution to the maximization problem, but the upper bound for development density
The full information assumption is not unreasonable as planning processes require time for information to be disseminated. A repeated game is omitted in this analysis as the probability of having the same developers with competing white sites is very low.
It is also noted that
This assumption is not difficult to justify since the difference between unit price and cost of construction is often large. If this assumption is violated, Equation 8 must be modified to include the square terms instead. So (a 1−c 1)2 > (a 2−c 2)2.
A Nash equilibrium means that the players make the best decisions (strategies) they can as a response to what others are meant to do.
A formal model to this effect would be interesting research.