Homeowners Associations, Collective Action and the Costs of Private Governance

Abstract

This paper examines collective action problems in privately managed neighbourhoods and considers government and market reponses to these. Taiwan's experience of Home Owners Associations (HOAs) is used to show that entrepreneurs have a strong incentive to deliver private governance capacity and are apparently more effective in doing so than either government (by coercion) or residents (by voluntary association). However, government needs to reduce certain collective action costs by providing appropriate enabling legislation. While the market can deliver private democratic government, it cannot do so in a way that avoids many of the costly features of public government. Within HOAs, problems of information asymmetry and opportunism, collective action and rent-seeking all persist. The paper concludes that much of the efficiency of contractual democratic neighbourhoods comes through the privatisation of bureaucracy—handing over civic goods and services supply and management to highly competitive and innovative property companies—rather than through HOA governance structures per se. The latter are characterised by many of the same problems that weigh down conventional municipal government.