ECONOMICS UNIQUENESS

INVESTING IN THE SENSE OF PLACE ■ 35
dimension, it is thus important to include mechanisms to align private incentives
with social objectives.
Externalities, Self-Correcting and Otherwise
As shown above, decentralized investment decisions lead to insuffi cient investment
and excessive demolition. While the fi rst externality can somehow take care
of itself, the second one is bound to lead to a socially suboptimal outcome. Th e
self-correcting externality concerns the level of private spending on upgrading or
replacing properties without architectural value. As discussed above, this spending
gradually converges to the level that maximizes collective profi ts. Initially,
local residents and outside investors spend less, because they take spending by
others as given. But eventually, as others upgrade their properties and construct
new buildings, they also adjust their own spending level upwards. In terms of the
analysis above, their individual spending gradually increases from I i
1 to Ii *. It is
important for the authorities to take this gradual increase in private investment
into consideration when appraising an urban upgrading project, but unless they
want to speed up the convergence process, they do not need to take action.
On the other hand, there is no self-correcting mechanism in the case of renovation.
While the socially optimal choice may involve preserving some or all of
the buildings with architectural value, this is unlikely to happen spontaneously.
Th e local residents and outside investors who own those buildings face no incentive
to preserve and renovate them. Th ey might not have considered spending any
resources on them in the absence of the project. But the prospect of improved
urban infrastructure and the fi nance provided by transfers T i from the project may
lead them to invest. Th eir investment could well include demolishing old structures
and replacing them with newer ones, or altering the old structures in ways that
undermine their character. Th erefore, even if substantial spending R on renovation
is foreseen by the authorities, by the time the project reaches the implementation
phase there could be no buildings with architectural value left to be renovated.
Th e second externality from private sector behavior could be overcome if
there were a single investor for the entire area, who would then internalize the
eff ects of demolition. Unfortunately, there are not many examples of this happening
in practice. Th e SoHo (South of Houston Street) neighborhood in New
York and the Art Deco district in Miami are among the few coming close. In
both cases, a single outside investor (Tony Goldman) bought a critical mass of
property, which supported an unusual combination of architectural preservation
and profi t maximization. In recognition for this accomplishment, the National
Trust for Historic Preservation awarded him its highest distinction in 2010. But
even in those two relatively extreme examples, the mass of property bought by
the investor amounted to only a fraction of the area. Given the shortage of known