An institutional analysis of land markets

For many years, land markets have been analyzed as though parcels of land were being traded in a frictionless market subject to no rules. To the extent that there were rules which could not be ignored – such as land-use regulations – the effect of these was incorporated as ‘distortions’ to the market. An institutional analysis of land markets, on the contrary, starts by looking the the rules which structure the exchange of rights in land. These are the formal rules regulating such things as access to the market, which rights may be traded and which not, land-use and environmental rules, fiscal rules, inheritance rules. Then there are the informal rules, customary practices, taken-for-granted ways of doing things. All those rules create a structure which affects the availability of information, risk and uncertainty, transaction costs, organizations for buyers and sellers and brokers, etc. It is assumed that people act in a rational way within that structure. The results are the market outcomes: what is traded where, by whom, in what volume, at what price? This paper sets out the method for such an institutional analysis and applies it to two land markets in the Netherlands – for agricultural land and for land on industrial estates. The results of applying this analysis allow market outcomes to be explained better than by an analysis which ignores institutions. The paper is based on research carried out by the authors at the Netherlands Institute for Spatial Research (Ruimtelijk Planbureau).