Academic journal article Contemporary Economic Policy

Commercial Revitalization in Low-Income Urban Communities: The Holdup Problem and Urban Development Policy

Academic journal article Contemporary Economic Policy

Commercial Revitalization in Low-Income Urban Communities: The Holdup Problem and Urban Development Policy

Article excerpt


Offering subsidies for commercial development is a popular urban revitalization strategy that has been implemented in many U.S. cities including New York, Chicago, and Boston. Its popularity is founded on the belief that low-income urban communities are underserved by stores. Residents in these communities spend a greater share of their income shopping outside of their own neighborhoods. For example, in 1996 Chicago residents living in the neighborhoods of Little Village and South Shore made about 62% and 70% of their purchases outside of their neighborhoods, while residents of the average Chicago neighborhood made 37% of purchases outside (Weissbourd and Berry 1999). Lack of locally available commercial goods and services has a negative impact on the welfare of inner-city residents, usually poor people who rely on public transportation (Glaeser. Kahn, and Rappaport 2008).

According to estimates in New Markets: The Untapped Retail Buying Power in Ameriea's Inner Cities, a report by the Department of Housing and Urban Development (HUD) (Cuomo 1999), U.S. inner-city neighborhoods had an unmet retail demand of $8.7 billion. Despite this documented underprovision in low-income urban communities, we know very little about the nature of this problem. Why don't stores enter these communities to meet the excess demand? Sonic people believe that high crime rates (actual and/or perceived) and high cost of operation in these communities are the main entry barriers for retailers and service providers. These problems do not just deter entry; they have a negative impact on the survival of businesses as well. If these problems are the reason for underprovision. then entry triggered by government subsidies will not be sustainable without continued government support.

Recent commercial revitalization successes in low-income urban communities suggest that there may be problems that deter entry but do not affect the viability after entry. A well-known example is Harlem, New York, one of the six Round I federal urban Empowerment Zones (EZs). Before Harlem was designated as EZ in 1994, it had not had any large-scale commercial development since the 1960s, and 70% of the shopping by Harlem residents was done outside of the neighborhood. With public subsidies to developers, the community saw the opening of Harlem USA, a 275,000 square-feet retail and entertainment complex, in 2000 and the opening of East River Plaza, a 485,000 square-feet retail shopping center, in 2009. (1) In 2010, three developers (2) announced on the same day total planned investment of about $116 million in commercial development projects in Harlem.

Consistent with this kind of commercial revitalization success, this article shows that a holdup problem between developers and anchor tenants may lead to commercial underprovision in low-income communities even if they do not have high crime rates or high cost of operation. Governments' intervention to solve the holdup problem will generate self-sustainable commercial activities.

The commercial development model in Section II builds on existing monopolistic competition models of spatial agglomeration (Fujita 1988), in which consumers have a taste for different varieties of goods and services (Dixit and Stiglitz 1977, Spence 1976) and have to incur travel costs to the location where goods and services are provided. Fujita (1988) assumes a linear city whose residents have to purchase goods within the city. In this setting, a city without commercial firms is not possible in equilibrium and firms will choose to locate at the center of the linear city without coordination. The model in this article studies a circular community whose residents have the option to purchase outside of the community. Under this assumption, a community without commercial firms is a possible equilibrium outcome and the entry decisions of firms are closely related to the coordination mechanism because there is no obvious center in a circular community for uncoordinated agglomeration to occur. …

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