From Market Urbanism writer Emily Washington: “Earlier this week I attended an Urban Land Institute event about DC’s new development, The Yards. This is a 42-acre area that was formerly a manufacturing center for the Navy. In 2003, Forest City Washington purchased the site from the General Services Administration for residential, retail, and office redevelopment.
“During the presentation, I was reminded of Ronald Coase’s 1937 paper, ‘The Nature of the Firm’. He explains that firms exist, rather than each worker serving as his own contractor, because firms reduce the transaction costs of contracting for individual projects:
“‘In economic theory we find that the allocation of factors of production between different uses is determined by the price mechanism. The price of factor A becomes higher in X than in Y. As a result, A moves from Y to X. Yet in the real world, we find that there are many areas where this does not apply. If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so.’
“In the case of The Yard, this means that Forest City Washington is saving money on development expenses…and giving up the price system which would better direct firms developing individual parcels to know what their customer want. This tradeoff is represented above. Firms will increase in size until the cost of not being able to rely on the price system is equal to the transaction costs of contracting work out.
“During her presentation, Deborah Ratner Salzberg stressed her firm’s objective of creating a ‘complete neighborhood’ with a balance of residential development and a mix of retail. By one firm developing this entire small neighborhood, they had the advantages of knowing which tenants were likely to sign leases in which buildings and controlling the vision for development within one company. However, they were not bidding against other developers to determine the highest-value buildings for each parcel, meaning that planning, rather than the price mechanism, shaped the definition of a ‘complete neighborhood.’” Full article here.