Private Cities, Continued

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On this post, Patri Friedman commented,

Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost. You are trying to compete with established, funded incumbents who are easily 256x bigger than you and thus with 1/4 the infrastructure costs. And with high transaction costs for their customers to leave.

I think that the last sentence, concerning transaction costs of leaving, is interesting. I am not sure what the equilibrium would like if you brought those costs to zero.

Suppose that a big challenge with creating a new city is that the value is in the people there. This creates a Catch-22. You cannot convince me to move to a city until I know there are people there with whom I want to interact. And there won’t be people with whom to interact until you convince people to move to the city.

If there were zero transaction costs in changing cities, then you might get me to try a city before I am sure that it has enough interesting people for me. However, if I know that there are zero transaction costs to changing cities, then when I see interesting people in a city I may not be confident that they will stay there. So what do I do in that case?

I think that in that scenario, cities would behave like dating bars. Such bars tend to surge in popularity until they suddenly lose clientele.

8 thoughts on “Private Cities, Continued”

  1. Another post here emphasized that the government is actually at a disadvantage with regards to infrastructure costs, even compared to other governments. A private city should be able to compensate for any economies of scale with a more streamlined and businesslike approach to construction.

  2. Here’s a different take – If I already live in a decent metro area, why do I expect your privately run city to be any better over even the medium term?

    More or less private cities have indeed sprung up in places like India. So if today I live in, say, one of the large slums of Nairobi, I might like to move to a well run private city.

    But from the nice cities in the world, and especially the nice suburbs of the nice cities of the world, where is there to go but down?

    Aside – all of the focus on “where are the key human elements” is totally correct – but don’t forget that many existing cities are cited on particularly desireable geographic locations. Your private city will have a very hard time finding a nicer and perhaps more economically useful location than those already held by San Francisco, Portland, Seattle, etc. I’m not as famaliar with east coast cities, but I would presume that for a starting location Boston, NYC, etc. are kind of hard to beat.

  3. My wife and I were in New Orleans seven months after Hurricane Katrina. We took a walking tour of the Garden District, which was relatively undamaged. Our guide was a native of New Orleans who had just returned for the first time since the storm. He said that his house (in the Ninth Ward) had been destroyed. He had an insurance settlement, but before rebuilding he wanted to know whether his neighbors would rebuild, whether the local schools would reopen and a lot of other things. It made me realize just how much of a collective action problem rebuilding the city was. I imagine that building a city from scratch would be much harder.

  4. By the way, one way to solve certain coordination / collective action problems like this – “I’ll only do it if I know a lot of other people like me are also going to do it.” – is through the ‘Kickstarter’ mechanism.

    A typical kickstarter project has a profile of large fixed costs, low marginal costs, and so large economies of scale. The company is trying to discover what the demand curve looks like for a novel product without actually producing or selling any of them first.

    But it can take a good guess at the supply curve, and say, “If we sell a thousand, we can make a decent profit margin at price X, if we sell ten thousand, we can do that at the lower price of Y.”

    And then if offers people the ability to pre-commit to purchase the items, but only if there are enough other precommitments. One pays nothing until the number of other commitments reaches the target subscription, and at that point the commitment becomes binding, the money is transferred, and the product produced and shipped. If enough people make early orders, the price can even go down to Y, even if you were willing to pay X.

    The problem of filling up a new private city could perhaps be solved with some clever variation of this mechanism, but there would also be the issue of how to enforce the commitment to migrate. In this way, you could come up with a new private city business plan that includes taxes, services, and selective demographic criteria, and test the demand curves. Putting aside questions of legality, one could even try the nightclub model and discriminate with regard to pricing (like ‘ladies’ night’) to bring in people who have a special ability to attract other desirable residents who would be willing to pay a lot extra in taxes to subsidize the residency of those attractors, whom they wish to live around.

    There should be a whole ‘utopia-starter’ website devoted to discovering the demand curves for various visions of the governance and legal and social arrangements of these private cities. That’s a kind of a spin on the Futarchy concept, but again, one would actually require a way to establish the city and enforce the commitment bids to produce informative results.

    Also, I’m not sure people would be all that happy with what the revelation of peoples’ genuine social preferences turn out to be, which probably won’t align well with the political values people are expected to extoll in public. People aren’t that happy with the analogous results coming out of the analysis of behavior on dating sites like OKCupid.

  5. I like that metaphor. Because there are all these dynamic effects of:

    A wants to be first
    B wants to be where A is, and A likes having B around, so B moves & A stays.
    C wants to be where B & A are, so C moves, but A doesn’t want to be around C so now A moves out, and B moves out, and C moves out.

    But I think this would be counterbalanced by the nature of real estate and urban infrastructure (expensive, slow to build, etc). As people move out of a city, rents drop (because the people don’t take their houses when they go) and that draws people. As long as the city post-coolness is still safe and well-governed (ie it has not become like Detroit), it seems unlikely to have huge population swings (though it may have huge coolness swings).

    It seems like contractual agreements to stay in a city for some period of time could help.

    An option that sort of combines these would be if there are industries whose employees are interesting that require expensive fixed infrastructure. If the city has a huge shipyard, and you think people who work in the marine industry are interesting, well, the city is probably always going to have lots of those people.

    Anyway, it seems likely that transaction costs to leave a city will continue to be high for awhile. The internet has not replaced in-person relationships, and the cost of leaving one’s family & friends is substantial and tends to grow with age.

  6. “Think about the famous “double size, increase infrastructure cost by only 85%” rule for cities. So roughly every 16x size increase halves cost.”

    But to what extent do rent-seeking, cronyism, and congestion costs counterbalance that? I see a lot of lots of small communities with very low costs. Security costs are minimal because crime rates are very low, and there’s not enough of a concentration of bureaucracy and money to attract and support cronyism and rent-seeking public sector unions.

    ” As long as the city post-coolness is still safe and well-governed (ie it has not become like Detroit), it seems unlikely to have huge population swings (though it may have huge coolness swings).”

    But Detroit is just not an outlier — St Louis has actually lost a slightly greater percentage of its peak population than Detroit, and Cleveland, Buffalo, and Pittsburgh are right up there as well. In fact, there are a couple dozen U.S. cities of over 100,000 that have lost more than 20% of their population.

    http://en.wikipedia.org/wiki/Shrinking_cities_in_the_United_States

    Note that both Philadelphia and Chicago are on the list with population losses of over 25%. And these number significantly *understate* the competitive failures of these established cities relative to their upstart local competitors because in almost all cases the surrounding metro areas were still growing. Jjust maintaining their populations would have represented a significant loss of market share, but all these cities couldn’t manage even that — instead they shrunk absolutely even in growing regional markets.

    To get a true picture of how the supposed infrastructure advantages failed to deliver, consider that in 1950, the city of Detroit accounted for 1.8 of the 3M people in the metro area. Now it accounts for 700K of 4.3M. That represents a market share decline from 60% to 16%. For Chicago, the loss is not quite as dramatic, but it’s not as far off as you’d think. In 1950, Chicago was at 61% and now it’s at 28%.

  7. A way forward would be a new university/college town that exploits new technologies of higher ed and city infrastructure with the natural opportunity of kids moving out to go to college. Provide the city night life, a decent climate, (naturally low crime) and some new PSST recalculation job opportunities, perhaps along a transportation corridor, and voila, new city. Could a GE or Microsoft develop the city around robotics or business teleservices? The question is what are the technologies that both provide jobs and undermine the incumbent advantage. Let’s say Elon Musk built an airport in the middle of nowhere and then started the evacuated tube transport tunnel hub there and promised to build a tunnel to the first city that fast-tracked the right of ways?

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