The Quality of Residential Community Governance: Subdivision (HOA) versus Rental
35 Pages Posted: 31 Aug 2018
Date Written: August 16, 2018
Many economists argue that homeowners associations (HOAs) are a promising form of privatization. But critics argue that HOAs suffer from conflict and resident dissatisfaction. However, Demsetz observes that a governance institution may only fail by comparison to some relevant, superior alternative. This paper explores the puzzle of HOA failure by comparing the respective governance incentives of the HOA and the residential landlord. The residential landlord is an alternative to the HOA because both landlords and HOAs provide collective goods and governance to residents. I show that landlords will tend to have longer time horizons and a greater residual claimancy. I argue that federal promotion of HOAs may be the result of rent-seeking by real-estate developers who sought to evade residual claimancy. I conclude that federal support for home ownership should be reconsidered, and that in the future, studies of HOAs should more explicitly compare HOAs to a relevant alternative.
Keywords: HOA, homeowners association, rental, residential, housing
JEL Classification: R31, D71, H00
Suggested Citation: Suggested Citation