Li, Yue, Martimort, David, Rama, Martin and Straub, Stéphane (2026) Incentives and the City : Towards a Theory of Urban Governance. TSE Working Paper, n. 26-1775, Toulouse

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Abstract

We develop a theory of urban governance based on the allocation of residual claims over urban surplus. A developer undertakes non-verifiable investments that attract productive residents and generate agglomeration benefits. We compare five urban governance modes: two single-agent modes, public and private ownership of the developer, and three hybrid arrangements. Public ownership internalizes urban rents but weakens investment incentives. Private ownership restores these incentives but restricts access because the developer does not capture property-market rents. We characterize this trade-off and study the three hybrid arrangements. Performance contracts subsidize access, equity contributions make quality observable and contractible, and rights transfers consolidate access and property rights. These arrangements provide alternative ways to improve urban development when investment is non-verifiable.