Property, Politics, and Prices

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Closing the Deal Principals, Agents, and
Sub-agents in High Country Land Reform
Ann Brower With Phil Meguire, Adrian Monks, and
John Page
Rees Valley Gilbert van Reenen
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(No Transcript)
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From 1992 - 2006, rights in 490,000 ha
re-allocated
Crown paid 37.0 M
42
Now Public conservation land
58
Lessees paid 18.5 M
Now Freehold land
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What is driving these payments?

• Hypothesis 1 property rights
• - basic law and economics
• Cash payment depends on value and ownership of
  property rights in exchange.

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ValueHow much are rights worth?

• Land developed beyond pastoralism is worth more
  than pastoral land (Stillman 2005)
• intensive pastoralism 2.5 times more valuable
  than pastoralism
• lifestyle blocks 10 times more valuable than
  pastoralism
• horticulture 14 times more valuable than
  pastoralism
• So rights to develop are more valuable than
  rights to graze

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OwnershipWho holds which rights?

• Crown pastoral land is "suitable or adaptable
  primarily for pastoral purposes only." (Land Act
  1948)
• A pastoral lease gives the holder
• (a) The exclusive right of pasturage over the
  land
• (b) A perpetual right of renewal for terms of 33
  years
• (c) No right to the soil
• (d) No right to acquire the fee simple of any of
  the land. (CPLA 1998 4(a-d))

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Contested ownership

• Crown owns 100 of value of devt rights
• Farmer owns 50 of value of devt rights
• The value of these opportunities is shared
  between the two parties to the contract.
• (Aspinall ODT May 2006)
• 3) Farmer owns 100 of value of devt
• these potentially valuable unallocated rights
  have been alienated by the Crown.
• (Thomson, The Press March 2006)
• 4) Devt rights have 0 value Crowns interest
  NPV rent
• value of the lessors interest is no more than
  the present value of the stream of rental income
  
• (Evans and Quigley 2006 Armstrong et al 2006)

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Financial expression of ownership Crowns
financial interest (CI)

• Treasury (1995) estimated
• Value of Crowns interest 50 M
• Value of lessees interest 36.4 M
• Crowns interest 50M 58
• 36.4M 50M
• In each lease
• CI Per hectare price paid by lessee
• Lessee per ha price Crown per ha price

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H1 Property rights hypothesisCrowns interest
driven by who owns devt rights
Crowns interest
100
Crown owns 100
58
Treasury
Crown owns 50
farmer owns 100
Devt 0 value
100
Percent of original lease area privatised
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H2 Norms, not law, drive payments

• To govern their workaday interactions members of
  a close-knit group tend to develop informal norms
  whose content serves to maximise the objective
  welfare of group members. People often choose
  informal custom over law not only because custom
  tends to be administratively cheaper (Coase 1960)
  but also because the substantive content of
  customary rules is more likely to be welfare
  maximizing.
• (Ellickson 1991 283)

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H2 Contra-Ellickson
Enacting legislation will reduce noise in tenure
review outcomes. So new statute in 1998 will
allow less fudging or wiggle room than pre-CPLA
norms. So post-CPLA results will display less
variability than pre-CPLA results.
pre
Post post post post

pre
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H3 Administrative politics, not law, drives
payments.

• Principal agent problem, a.k.a. the Yes,
  Minister model of politics
• The principal directs agents to do something,
  and agents do something else entirely because the
  principal does not know what the agents are
  doing.
• Principal Minister of Land Information
• Agents LINZ officials
• Sub-agents Contractors from 3 firms (DTZ, Opus,
  Quotable Value)
• Ultimate principal the public

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Asymmetric information and closing deals

• 1) Aug 2006, minister declassifies payments
• Payments were secret from 1992 Aug 06
• 2) Sept 2006, Minister starts looking at each
  deal
• No ministerial oversight from 1992 Sept 06
• 3) Sept 2006, deals stop
• Dec 07, still no more deals

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Chinese whispersinstructions and incentives

• Principals instructions to agent
• Close deals
• Obtain a fair financial return for the Crown
• Operate independently, without ministerial
  oversight
• Agents instructions to sub-agents
• Be neutral
• Do not advocate
• Rewards for sub-agents
• Paid to close the deal
• Not paid more for a good deal
• Not paid less for a bad deal
• No absolute bottom line reserve price

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H3 Closing the deal

• Sub-agents will close deals at any cost to the
  public because they are paid by the deal, and the
  public didnt know the costs.
• Sub-agents will pay what farmers want.
• Pattern of payments will track farmers demand
  curve (downwardly sloping line)

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H3 Closing the deal
H1 Property rights
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Results
Pre-CPLA 1998
Post-CPLA 1998
Reject H1 property rights Reject H2 contra-law
and norms Fail to reject H3 closing the deal
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But wait, do auxiliary variables explain results?
Not strongly.
CI ?0 ?1D98 ?2PF ?3PF?D98 ?4Aux
?5Aux?D98 ? Aux one of Ploc, RENT,
EASE   P(Ploc0) 0.004 P(RENT0)
0.96 P(EASE0) 0.91
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Forecast errors (a.k.a. outliers) all
post-1998,and all large Crown payouts
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Welfare-maximising norms (H2) and closing the
deal (H3)

• H2 Ellickson (1991) small, closed groups
  sometimes resolve property disputes by following
  social conventions rather than the law because
• More efficient (lower transaction costs)
• Conventions serve collective goals of small,
  closed group

What sub-agents want A deal
What farmers want A desirable deal
vs
High cost deals benefit all parties to the
negotiation
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Of Ellickson, principals, and agents

• Farmer maximises welfare by maximising economic
  rent
• in land hectarage, large Crown payout, or both
• Sub-agent maximises welfare by closing the deal
• Cost not an issue
• Ministerial and public principals notably absent
  from close-knit group of welfare-maximisers at
  the negotiating table
• Crown offering a bulk discount while privatising
  land appears less than equitable to public or to
  farmers.
• Ellicksonian and agency theories merge
• But Ellickson studied private neighbours
• Is the Crown free to disregard the law in favour
  of efficiency?

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Some spheres of life seem to lie entirely beyond
the shadow of the law. (Ellickson 1991)
Some spheres of life seem to lie entirely beyond
the shadow of the law. (Ellickson 1991)
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Fragile powerThe rise and fall of farmer
dominance

• 1) Unquestioned ideas of ownership created policy
  image favourable to farmers.
• 2) Apolitical administrative process with no
  ministerial oversight quelled public opposition.
• see Baumgartner and Jones 1993
• 3) BUT when image or oversight changes, dominance
  can fall.

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'Tenure Review Worries Prompt PCE Enquiry
Otago Daily Times1 June 2006'Farmers and
Greenies Swap Positions' National Business
Review 18 August 2006
1) Changing policy image
Fulbright scholar raises farmers ire National
Business Review 24 April 2006
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Tenure review chances are youve got absolutely
no idea what this phrase means. Despite nearly 20
per cent of the South Island being carved up and
some of the countrys most precious landscapes
coming under threat, people are only just
starting to wake up to its enormous effects. MIKE
WHITE travels south and unravels a process that
even the government is now desperately trying to
rein in.
High Country Hijack
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So from now on all preliminary and final
proposals will come through his office before
they go to farmers something that,
extraordinarily, hasnt happened since the Crown
Pastoral Land Act was passed in 1998. Parker
defends his predecessors, saying You just dont
have time to review every proposal. Yet somehow
hes found the time now. White, M. North South
Minister steps in, takes over agents
job Deals stop.
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28 February 2007 TV 3 Campbell Live
The great South Island land rip off Why are some
South Island farmers getting taxpayer owned land
for cheap and reselling it for millions of
dollars?
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Countervailing power emerges May
2007 www.stoptenurereview.co.nz
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Crown withdraws from land review The Press, 23
June 2007
Lakesides not for sale National Business
Review, 26 Nov. 2007