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An Analysis of the Housing Redevelopment Process in Korea

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DOI: 10.1177/0042098010375324 · Source: RePEc

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An Analysis of the Housing Redevelopment Process in Korea through the Lens of

the Transaction Cost Framework
Cheol-Joo Cho
Urban Stud published online 9 November 2010
DOI: 10.1177/0042098010375324

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 1–25, 2010

An Analysis of the Housing

Redevelopment Process in
Korea through the Lens of the
Transaction Cost Framework
Cheol-Joo Cho
[Paper first received, February 2008; in final form, March 2010]

Abstract
This paper applies the transaction cost framework to the analysis of the housing
redevelopment process in Korea. The housing redevelopment process involves various
identifiable transactions and cost-incurring hazards which originate from uncertainty
about development potential and effects, interdependencies and the consequent
strategic behaviours of relevant parties. Responding to the characteristics of the
transactions and hazards, various forms of governance structure are institutionalised.
The extant governance mechanisms fit neither perfect market nor pure hierarchy.
Rather, hybrid forms of governance spanning the public and private spheres are aligned
with the relevant transactions. On the other hand, a remediableness test indicates that
different governance mechanisms which seem more efficient than the current ones can
be identified for each stage of housing redevelopment. This finding marks a superb
potential of the transaction cost approach for assessing institutional efficiency that the
Pigouvian approach does not have.

1. Introduction
Much debate has occurred on the raison
d’être of the institutional structure for real
estate development: ‘On what grounds are
the specific co-ordinating mechanisms of
urban development justified?’ Two competing
disciplines—i.e. Pigouvian welfare economics
and transaction cost economics, are promi-
nent in answering this question. Pigouvian
welfare economics supports government
intervention in private affairs when market
failures exist. Its disciplinary premise is that,
in cases of the market failure, markets, if left
to their own devices, fail to result in socially
efficient allocations of resources—i.e. Pareto
efficiency. Here, the traditional market failures
include public goods, externalities, natural

Cheol-Joo Cho is in the Department of Urban and Regional Planning, Cheongju University, 586
Daeseong Street, Cheongju, Chungbuk, 360-764, Republic of Korea. E-mail: cheoljcho@cheongju.ac.kr.

0042-0980 Print/1360-063X Online

© 2010 Urban Studies Journal Limited
DOI: 10.1177/0042098010375324
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2   CHEOL-JOO CHO
monopolies and information asymmetries
(Weimer and Vining, 1992; Anderson, 2004).
The general concept of market failure can be
projected to the land and real estate markets
case to include the inadequate provision of
public goods and the prevalence of exter-
nalities. From the Pigouvian perspective,
then, government intervention should be
limited to the production of various kinds
of public goods such as regulatory policies,
capital goods and informational goods, which
is designed to eliminate present and future
externalities (Webster, 1998). This line of
policy prescription of the Pigouvian frame-
work implicitly or explicitly pre-supposes a
separation between the public domain and
markets, meaning that a sharp borderline can
be demarcated between planning intervention
and free markets.1
Yet a glance at the real-world cases reveals
the fallacy of this simplistic dichotomy
between the planning realm and markets.
Planning and markets are not definitely sepa-
rated: planning is not limited to the public
sector, nor do markets exclude planning
(Alexander, 2001b). Then, the open bound-
ary between the planning and market spheres
and the co-existence of planning and markets
in both domains suggest that the relevant
distinction is not between the public domain
and markets, but between alternative forms of
institution for co-ordinating transactions—
i.e. market and less- or non-market forms of
organisation (Alexander, 2001b).
The blurred government–market con-
tinuum indicates the inadequacy of the
Pigouvian approach in explaining the com-
plicated process of urban development which
is co-ordinated through the multipart cross-
public/private institutional arrangements
of various actors and agencies. The analysis
of such intricate intra or interorganisa-
tional co-ordinating mechanisms can best
be approached from the transaction cost
framework.2 The main idea of transaction cost
economics is that markets as a co-ordinating
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institution are modified to economise on
transaction costs. The consequence of the
institutional adaptations is the emergence
of various forms of governance structure.
Transaction cost economics interprets gover-
nance as organising transactions in order to
economise on transaction costs (Ruiter, 2005).
The scope of alternative governance structures
initiated to co-ordinate all social activities,
including urban and real estate develop-
ment, ranges from market forms through
hybrid to hierarchical forms of organisation
(Williamson, 1989, 1991, 2002; Alexander,
1992, 2001a, 2001c; Buitelaar, 2004).
If the public and market sectors cannot be
separated, the concept of Pareto efficiency is
no longer a valid criterion for assessing the
performance of urban development in which
the multipart governance structures organised
across the public and market spheres are initi-
ated to mitigate transaction costs. In the fric-
tionless Pigouvian world, the relevant policy
process is to discover discrepancies between
the ideal and the real and, if discrepancies
are found, it is deduced that the real is totally
inefficient (Furubotn, 1999). However, once
positive transaction costs are assumed, this
kind of all-or-nothing viewpoint is meaning-
less. Given the restrictive non-artificial setting
of urban development, the transaction cost
framework sheds light on the impediments
to reaching Pareto efficiency (Dawkins, 2000).
Unlike the Pigouvian approach in which
the primary concern is given on outcome
efficiency, the transaction cost framework
takes into account a more practical efficiency
criterion—i.e. process efficiency, which can
be attained through the transaction-cost-
economising behaviour of partisan actors
(Webster, 1998; Buitelaar, 2004).
Given that all social activities are co-
ordinated by a variety of governance struc-
tures, the key policy inquiry should be on
the question of process efficiency. Then, the
social undertaking under the transaction
cost framework is to find the most efficient

form or mix of forms of governance—i.e. the
governance structures best able to economise
on transaction costs. For this purpose, trans-
action cost economics attempts to account
for the hidden costs of co-ordination that
the Pigouvian analysis ignores, extending the
search for inefficiency to look at the costs of
alternative forms of governance. In this way,
the transaction cost framework shows off its
normative potential for institutional analysis
and design which the Pigouvian approach
cannot offer, providing plausible answers to
the question: why can a specific governance
structure be claimed to be superior to others?
Applied to urban development, this norma-
tive potential compares alternative forms of
governance structure for the development
process and accordingly identifies the most
efficient governance structures.
To extend the threshold of transaction cost
economics, this paper aims to examine urban
development in Korea in accordance with the
transaction cost framework. Specifically, the
housing redevelopment process will be anal-
ysed in terms of how well the specific transac-
tions and relevant governance structures fit
together to economise on transaction costs.
This analysis will primarily reveal the pros
and cons of the various forms of extant gov-
ernance mechanisms instituted to co-ordinate
the housing redevelopment process in Korea,
which cannot be uncovered by the welfare
economics view that assumes a dichotomy
between the market and the government.
Given that different governance forms have
different transaction costs, by comparing the
transaction costs of different institutional
arrangements, the process efficiency of indi-
vidual governance form can be assessed. Next,
based on the efficiency of the existing institu-
tions revealed, the most effective, alternative
governance forms organised across the public
and private spheres will be looked for.
The next section briefly outlines the ele-
ments and processes of the transaction cost
framework, with particular reference to
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ANALYSIS OF HOUSING REDEVELOPMENT   3
urban and real estate development. This is
followed by an overview of Korea’s planning
scheme, which provides information on the
overarching institutional outlet within which
urban renewal operates. Next, an institutional
analysis is executed with the application of
the transaction cost framework to assessing
housing redevelopment in Korea. Finally,
conclusions and implications follow.
2. The Transaction Cost
Framework
Transaction cost economics begins with the
attention on institutions and transaction costs
that Pigouvian welfare economics overlooks.3
Pigouvian welfare economics assumes a
perfect market in which property rights are
perfectly and costlessly specified and informa-
tion is likewise costless to acquire—that is, the
market functions frictionlessly and smoothly.
Then, the Pigouvian framework presupposes
zero transaction costs, thereby implying that
any cost whatever that exists in the market is
a production cost.
Coase (1960) considers that, if prop-
erty rights are well established and there
are no transaction costs, an externality
can be internalised between private parties
through voluntary bargaining and nego-
tiations. Countering Pigou’s call for govern-
ment intervention to curb externalities, the
Coasian argument shows that government
intervention is in fact not necessary in the
world of zero transaction costs. However,
in reality, including land use and property
markets, transaction costs are ubiquitous.
The existence of non-zero transaction costs
means that some trades through voluntary
bargaining that would be undertaken if the
cost of unpriced transactions were zero do
not occur. The failure to undertake these
voluntary trades is none other than a market
failure in the standard welfare economics
term. In essence, market failures exist because
the costs of resolving them are so high that
4   CHEOL-JOO CHO
further voluntary trades between parties are
prohibited. In this sense, every story about
market failures is just a story about trans-
action costs (Calabresi, 1991; Zerbe Jr and
McCurdy, 2000).
The failure of private parties to engage
in voluntary trades, which represents the
existence of costs in correcting market fail-
ures, is caused by inefficient institutions and
government regulations affecting market
transactions. This means that government
intervention does not go without its own
transaction costs. The transaction costs that
government institutions inherently cause
represent non-market failure, which is better
known as ‘government failure’ (Webster, 1998;
Pennington, 2000). Consequently, any trans-
action between the relevant parties, regardless
of private or public, results in certain degrees
of transaction costs. From the perspective
of transaction cost economics, then, the
Pigouvian argument that, as long as market
failures are existent, unlimited government
intervention is justified is not acceptable.
Admittedly, it is noted that the transaction
cost framework was initially developed to
explain economic institutions in the private
sector (Kim and Mahoney, 2005; Williamson,
1989, 1991, 1996, 2000, 2002). By adopting the
transaction between economic organisations
as its primary unit of analysis, the early devel-
opment of transaction cost economics focuses
on explaining the emergence, persistence and
evaluation of various types of governance
structure within or between firms. However,
as a need rises for an adequate theory of
institutional change that addresses the role of
public institutions in economic organisations,
the conventional method of transaction cost
economics has been extended across the pri-
vate sphere to analyse institutions in the public
sector. Although the transaction cost approach
to industrial organisations may not perfectly
traverse the public sphere, its usefulness for
the analysis of cross-public and public insti-
tutions has been successfully demonstrated.
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For example, Alexander (1992, 2001a, 2001b,
2001c) pioneers the application of the trans-
action cost framework to land use planning
and control and property development. In
a similar vein, Buitelaar (2004) analyses the
land development process in the Netherlands
through the lens of transaction cost econom-
ics. In addition, Birner and Wittmer (2004),
who explore the efficient role of the state in
natural resource management, and Richman
and Boerner (2004), who determine the opti-
mum regulatory governance for locating waste
facilities, also represent examples of applying
the transaction cost framework across the pri-
vate and public spheres. In a different context,
Williamson (1999) uses the transaction cost
framework to evaluate the suitability of the
public bureaucracy to transactions in the area
of foreign affairs.
The transaction cost approach to institu-
tional analysis in the private market or the
public sector alike is operationalised through
addressing a series of activities: the identifica-
tion of transactions and the related hazards
and costs, the assessment of efficiency of
extant governance structures to minimise on
transaction costs and the recommendation of
alternative forms of governance to replace the
inefficient governance mechanisms. These are
sketched out next.
2.1 The Identification of Transactions
and Related Hazards
In the transaction cost framework, the
transaction is the basic unit of analysis.
Transactions take various forms of activi-
ties: production or transformation of goods,
services, ideas and information; marketing
and sale of goods, services and intellectual or
other capital; private and public investment
such as funding capital projects and human
resources programmes; procurement—buying
or acquiring products, services, ideas, infor-
mation and human resources, and transfer
and distribution—in the private sector,
receiving income and distributing dividends,

pensions and so forth and, in the public sector,
receiving revenues and distributing subsidies
and transfer payments (Alexander, 2001a).
To the extent that the transaction operates
in the friction-laden world, it is subject to
some degree of transaction cost. The sources
of transaction costs are the cognitive and
self-interestedness attributes of human actors,
which are described as bounded rationality
and opportunism respectively (Williamson,
1999, 2002). Due to the cognitive restriction
and bounded rationality, uncertainty prevails
over most transactions and consequently
complex contracts are unavoidably incom-
plete. Participants confronted with uncer-
tainty tend to have risk-averse, opportunistic
behaviours.
The participant’s feasible foresight between
myopic and farsighted forethought gives rise
to contracting hazards that affect transaction
costs in the urban and property development
market. They are related to bargaining plan-
ning agreements among large numbers of
property owners, asymmetries in the level of
information about the valued attributes of the
property assets in question, the tendency of
property owners to engage in opportunistic
behaviour and defect on previously defined
agreements, and the level of uncertainty about
future market and environmental contingen-
cies (Dawkins, 2000).
A transaction has its own unique attri-
butes on which the participant’s transaction
hazards and relevant costs are dependent.
The most often referred to attributes of the
transaction are asset specificity, uncertainty
and timing (Williamson, 1991; Alexander,
2001a, 2001c; Buitelaar, 2002; Needham and
de Kam, 2004).4 Asset specificity, which refers
to the degree to which an asset that is used to
support a transaction can be redeployed to
more highly valued uses, leads to a condition
of bilateral interdepency in which neither
party has a good alternative to dealing with
the other party. The lack of substitutes avail-
able to either party makes both parties take
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ANALYSIS OF HOUSING REDEVELOPMENT   5
opportunistic behaviour from which a serious
transaction cost problem arises (Spurr, 2006,
pp. 62–63). Because most investments in real
estate development are specific to particular
types of use, the party making the initial
investment is locked in the market for some
period of time. Consequently, the hold-up
problem reduces the asset owner’s ability to
relocate assets to alternative uses or sites that
would be more productive.
Uncertainty is also linked to transaction
costs through the mediation of information
impactedness and opportunism. Uncertainty
is related to asymmetrical information about
the transaction, limited information about the
goals of other relevant actors, uncertainty in
the relevant organisational environment and
ignorance about relevant cause-and-effect
relations. By not only increasing the need for
and cost of information, but also delaying
development agreements, the uncertainty-
related problems cause various costs through-
out the planning and property development
process, such as speculative profits earned by
land speculators who have superior knowledge
about development potential, adverse selection
or screening costs caused by pre-agreement
advantage, and costly monitoring or incentive
schemes demanded when a party’s actions are
non-observable (Alexander, 2001a).
The timing dimension—i.e. the duration
and frequency of a transaction—is also cru-
cial to transaction costs. Independent and
frequently occurring transactions incur a
lower level of contractual hazards and result-
ing transaction costs, while long-lasting but
rarely occurring transactions cause substan-
tially complicated hazards such as incomplete
contracting, opportunism, asset-specificity
and bilateral monopoly.
According to their key attributes, transac-
tions can be distinguished as a market trans-
action, a mixed transaction or an idiosyncratic
transaction. Then, the transactions, which
give rise to distinct contracting hazards and
resulting transaction costs, evoke adaptations
6   CHEOL-JOO CHO
of the governance mechanism to avoid hazards
and economise on relevant transaction costs
(Williamson, 1991; Alexander, 2001a). Given
that the ultimate goal of transaction cost
economics is to highlight the features of
institutional adaptation, the identification of
the relevant transactions and their cost impli-
cations and the participating and affected
parties constitutes a critical procedure for
investigating institutional adaptations.
2.2 The Alignment of Alternative
Governance Structures
The process of tracing transactions and the
relevant parties sheds light on the transaction
cost consequences of alternative governance
structures and their relative effectiveness.
Given the premise of the transaction cost
framework that governance structures are
modified to economise on transaction costs,
they can be seen as continually evolving
towards efficiency. Hence, the extant gover-
nance structures might not be organised in a
most efficient way in terms of the least trans-
action cost standard. This view is grounded
on the notion that, in reality, institutions seem
to be quite robust and path dependent, and
hence are not very sensitive to the degree of
efficiency realised (Dixit, 1996; North, 1990).
As the contemporary institutions are, more or
less, distant from the best results, they need
to be put on scrutiny for the test of efficiency.
Definitely, the criterion that the transaction
cost framework adopts to judge a governance
structure’s efficiency is remediableness.
Unlike the Pigouvian approach, the prin-
ciple of remediableness does not refer to the
hypothetical ideal, which is unattainable in
reality, but compares other feasible forms of
governance, limiting the repertoire of possible
alternatives to those that fit the cultural, polit-
ical and institutional realities of the relevant
context (Furubotn, 1999; Williamson, 1999;
Alexander, 2001a, 2001c). Under the reme-
diableness criterion, the existing governance
system, with all its defects, is presumed to be
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most efficient if all the conceivable alternatives
are shown to be infeasible or inferior in terms
of transaction costs.
The remediableness principle for the choice
of the best governance structure is opera-
tionalised through the prescription of dis-
criminating alignment, by which transactions
that differ in their attributes are aligned with
governance systems that differ in their trans-
action costs and competences, in order to
achieve an economising result (Williamson,
1989; McGuinness, 1991; Alexander, 2001a,
2001c; Birner and Wittmer, 2004; Ruiter,
2005). The discriminating alignment between
the transaction’s key dimensions and alterna-
tive forms of governance in urban develop-
ment can be examined to determine the
governance structure that could minimise the
pertinent transaction costs.
The minimisation of transaction costs sets
off the institutional adaptations of private
or public organisations. Through the adap-
tation process, parties who are exposed to
various sources of transaction costs, seek
alternative forms of the contractual relation-
ship, establishing the efficient governance
structures to economise on them. The results
of institutional adaptations can take vari-
ous forms along the spectrum ranging from
market with high incentive intensity, low
administrative control and autonomous
adaptation, to hierarchy with low incentive
intensity, high administrative control and
co-ordinated adaptation. Between these
two extreme mechanisms various hybrid
governing organisations that embrace both
market and hierarchical elements emerge
corresponding to the relevant transactions
and their costs.
Williamson (1989) initially discriminated
between three forms of private-sector gov-
ernance—i.e. market, hybrid and hierarchy.
Needham and de Kam (2004) espouse this
classification scheme to analyse the alternative
governance structures that Dutch housing
associations choose for land exchanges. In

examining land use planning and development
control, Alexander (2001a, 2001c) proposes
third-party governance (administrative
support) and bilateral governance (market
support). On the other hand, Birner and
Wittmer (2004) distinguish three gover-
nance structures for managing local natural
resources, including pure state management,
a hybrid type combining profit-oriented
business enterprises with state management,
and the state and local community co-
management structure. In a similar vein, fol-
lowing Williamson (1999) and Dixit (1996),
Richman and Boerner (2004) liken regulation
to a hybrid model of governance that lies in
between the market hierarchy extremes. To
address the location problem of waste facili-
ties, they distinguish three broad categories
of siting regulation: information-enhancing,
process-enhancing and market-substituting
regulations.
So far, the key elements of the transaction
cost framework have been outlined. Indeed,
analysing the institutions of urban develop-
ment through the lens of transaction cost
economics means integrating the key elements
in a systematic way. Then, the operation-
alisation of the transaction cost framework
in urban and property development begins
with illuminating the processes along which
development unfolds. Once the processes
are grasped, the relevant transactions and
related parties, together with the key trans-
action dimensions and various hazards and
their transaction cost implications, should
be traced. This is followed by executing the
discriminating alignment hypothesis to assess
the relative efficiency of alternative forms of
governing mechanism.
3. The Planning System and Urban
Redevelopment in Korea
Due to the central role of the national
government in planning and development,
coupled with its exclusive authority to enact
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ANALYSIS OF HOUSING REDEVELOPMENT   7
planning-related laws, Korean planning is
portrayed as one of the most centralised
systems. Under the stringent hierarchical
planning order, provincial and local gov-
ernments exercise limited planning powers,
with most of the control functions left to
the central government. As the national
government has exceedingly strong power,
provincial governments play a weak role in
local planning and development. Unlike the
state governments in federal systems, the
provincial governments in Korea have no
power to enact enabling legislation for local
planning and development, from which local
governments are authorised to make their
own ordinances.
Central involvement in local planning takes
various forms, including financial assistance,
administrative orders, infrastructure provision
and urban renewal. These central-government-
initiated programmes are usually envisaged
through the enactment of relevant laws. The
most comprehensive stand-alone law that the
central government has passed to address local
planning and development is the Planning and
Use of National Territory Act (PUNTA). The
PUNTA spells out a number of detailed regu-
lations with which local government planning
and development are required to comply, cov-
ering such issues as the types of zoning district,
the regulations of land use, lot coverage and
density, infrastructure provision, urban design,
development permits and planning process.
The PUNTA delegates the detailed regula-
tions of urban renewal and redevelopment
to other separate planning-related laws. The
main legislation enacted to deal with urban
renewal are the 2003 Urban and Living
Environment Improvement Act (ULEIA) and
the 2006 Special Law for Promoting Urban
Redevelopment (SLPUR). The former regu-
lates relatively small renewal projects within
a single contiguous tract, which is designated
as the urban renewal district (URD). On the
other hand, the latter is intended to regulate
large projects in a wider area encompassing
8   CHEOL-JOO CHO
multiple discrete URDs, which is called the
renewal promotion zone (RPZ). A section of
the urban areas where blighted structures—
houses, office buildings, commercial stores,
factories, etc.—are concentrated can be
designated as an independent URD, with its
size limited to less than 33 058 square metres.
Under the ULEIA regulations, local govern-
ments can split a larger impoverished area in
the city into several discrete URDs, each of
which constitutes a single renewal project.
With multiple, fragmented small projects on
the single URD basis, it is hard to ensure an
adequate provision of area-wide public ser-
vices such as roads, schools, urban parks and
open spaces. By merely pursuing the maxi-
mum gains on their own behalf, the parochial
individual projects fail to adjust each other to
attain the optimal configurations of develop-
ment from the area-wide perspective. The
upshot is inefficiency in the use of land and
social resources: the underprovision of public
amenities whose service areas are large, on
one hand, and the duplicated provision of
small services over the fragmented areas, on
the other.
In recognition of the shortcoming of the
ULEIA in attacking urban renewal problems,
the central government has passed the SLPUR
to enlarge the spatial ranges of urban renewal
projects. According to the SLPUR regulations,
a large area within which multiple separate
URDs are contained can be established as
a RPZ. The size of a RPZ, if it is designated
within the CBD areas, sub-centres or com-
mercial areas, should exceed 200 000 square
metres, while within residential areas, it
should be greater than 500 000 square metres.
To promote urban renewal within the RPZs,
the SLPUR provides various policy incen-
tives, including, for instance, the relief of the
deed restrictions and regulations imposed
by other planning laws, such as the PUNTA,
the ULEIA and the Urban Development Law,
and the provision of financial assistance and
tax deductions.
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The ULEIA distinguishes four types of
urban renewal: housing redevelopment,
apartment reconstruction, adaptive reuse
and rehabilitation of existing housing, and
commercial and industrial renovation. The
stated goal of all these renewal programmes
is primarily to improve the obsolete built
environment in old urban areas, mostly in
inner-city areas, and subsidiarily to invigo-
rate the impoverished vitality in those areas.
Of the four types of urban renewal, housing
redevelopment is aimed at reconstructing
old inner areas where, in large part, dete-
riorated detached houses are densely clus-
tered, whereas the apartment reconstruction
project is intended to rebuild high-density
areas packed with decayed high- or low-rise
apartment buildings. On the other hand,
the adaptive reuse and rehabilitation project
focuses on the improvement of public facili-
ties and infrastructure, leaving the existing
houses untouched unless redevelopment is
imperative. The responsibilities for repairing
the existing deteriorated houses are left to
the property owner’s decision. The adaptive
improvement project, a relatively moderate
urban renewal programme, is implemented in
old urban areas where, due to higher political
as well as economic costs, complete clearance
and rebuilding of the existing buildings and
facilities are not feasible. Finally, commercial
and industrial renewal is targeted at restoring
the economic vitality of declining inner areas
where conventional markets and outdated
industrial facilities are concentrated.
Conventionally, urban policy agendas in
Korea, regardless of the levels of government,
have focused on the concerns of land use
planning and physical improvements. The
socioeconomic aspects of urban develop-
ment, such as social exclusion, urban poverty
and housing affordability, are by-and-large
overlooked. As it impinges on the property
development-oriented trend of urban policy,
urban renewal in Korea has emphasised profit-
generating estate development and physical

improvements over affordable housing and
community development (Kim et al., 1995;
Jeong, 1996). The consequence is that, as
urban renewal expands, low-income residents
or small businesses are driven out from the
development areas. In a sense, urban renewal
functions as a mechanism to render the under-
privileged a consistent loser: it displaces the
urban poor, exacerbates housing affordability,
raises their living expenses and tears down the
existing communities.
As urban renewal in Korea is overshadowed
by the profit-seeking motives of real estate
development conjoined with the physical
planning and design tradition, most urban
renewal definitely turns into a muddled
battlefield on which diverse but conflicting
interests with uneven powers engage in deadly
struggles to win the economic gains, which
frequently lead to an inescapable deadlock
(Hong, 2004). Indeed, urban renewal in
Korea is an extremely time-consuming and
complicated multistage process in which
many parties and stakeholders are contend-
ing, thereby evoking various independent or
idiosyncratic transactions and consequent
hazards and transaction costs. Of the four
types of urban renewal, housing redevelop-
ment, in particular, appears highly complex
and conflict-ridden. The next section is
devoted to analysing housing redevelopment
in Korea along the line of the transaction cost
framework outlined earlier
4. Housing Redevelopment in
Korea: An Application of the
Transaction Cost Framework
In this section, the transaction cost framework
that was outlined in section 2 is applied to
analyse the housing redevelopment process in
Korea. For this, first of all, the housing rede-
velopment process is broken up into a series
of stages and then, for each stage, relevant
transactions and the corresponding transac-
tion hazards and costs are identified. Secondly,
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ANALYSIS OF HOUSING REDEVELOPMENT   9
an assessment is made of the adequacy of the
current forms of governance which are insti-
tuted to co-ordinate the housing redevelop-
ment process—i.e. planning and development
controls—in terms of minimising transaction
costs. This is done by investigating whether
the current forms of governance are indeed
those forms which economise on transaction
costs. Finally, based on the evaluation of the
match between transaction characteristics
and the corresponding governance mecha-
nisms, alternative forms of governance that
are considered more efficient than the cur-
rent ones and feasible within the real-world
constraints, if any, are explored. In this way,
for each stage of the housing redevelopment
process, the most efficient governance insti-
tutions, extant or new, are sought for. The
operationalisation of the transaction cost
framework as applied to housing redevelop-
ment in Korea is next explained.
4.1 Stages and Transaction Cost
Implications
Housing redevelopment involves several
stages from the conception phase to the
final closure of the project. It clears up the
numerous existing properties, mostly densely
developed, obsolescent detached houses, and
returns the reconstructed housing to the
owners of the original properties, while set-
ting aside a portion of them to sell to outside
buyers. Each stage evokes various forms of
transactions and hazards and related trans-
action costs. Table 1 shows the sequence of
the housing redevelopment process, together
with the relevant parties and transactions
and associated hazards. The steps of hous-
ing redevelopment do not proceed in a strict
sequence, but rather partially overlap and
involve multiple rounds of feedback.
Preparation of the comprehensive urban
renewal plan. The ULEIA, a central law for
regulating urban renewal in Korea, mandates
large cities to prepare a city-wide comprehensive
10   CHEOL-JOO CHO

Table 1.   Stages of the housing redevelopment process and relevant transaction cost
implications in Korea

Stage Activity Involved parties Transactions Hazards

Preparation of Discovery of areas City government Negotiation Uncertainty/

the city-wide demanding urban Property owners between the relevant information
general urban renewal at the urban Tenants parties to reach an impactedness
renewal plan scale NGOs agreement for a Opportunism
Development of Planning quality plan and consequent
comprehensive plan consultant firms Outsourcing of plan- misrepresentation
for the identified making service to
renewal areas planning consultant
Designation Designation Provincial or Negotiation on Prolonged
of housing of housing metropolitan inclusion of specific duration of the
redevelopment redevelopment city government districts between feedback process
districts district with City government city government and between levels of
reference to the Property owners residents government
comprehensive urban Tenants Feedback loops in Uncertainty
renewal plan the approval process Property-
between levels of fragmenting
government activity for
speculative
purposes
Project Determination of City government Procurement of Relevant parties’
initiation project developer Developer professional services rent-seeking
Selection of Property owners (development behaviour
professional service Housing consulting, Bilateral
providers (planning redevelopment architectural design monopoly
consultant firm, consulting firm and constructing) between the
building contractor Planning Competition parties
and project consultant between the property Under-the-table
consulting firm) Building owners to be involved payments
construction in the developer
firm organisation
Plan Preparation City government Negotiations The tragedy of the
preparation of the housing Developer between the relevant anti-commons
redevelopment plan Housing parties to maximise Relevant parties’
with the Type 1 DUP redevelopment their own profits opportunism
process consulting firm and benefits Interdependence/
Preparation of the Property owners Feedback of review, asset specificity
transfer plan of Tenants amendment and Uncertainty
developed properties Planning approval (city The complex and
to the property consultant government, tedious process of
owners and tenants Building developer and plan approval
Approval of project contractor court)
start-up
Property Transfer of property Developer Transfer of Long duration of
acquisition and ownership to Property owners ownership negotiations
assembly developer Tenants Opportunism

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 ANALYSIS OF HOUSING REDEVELOPMENT   11

Table 1. (Continued)

Stage Activity Involved parties Transactions Hazards

Financing Housing Procurement Asset specificity
rent subsidies redevelopment of capital to Uncertainty/
or relocation consulting firms compensate the information
compensation for Contractor relocation of impactedness
property owners and builder residents
tenants Resistance to
the clearance of
properties
Clearance Execution of site Developer Negotiations Asset specificity
of existing preparation works Housing between developer Opportunism
structures Provision of redevelopment and unco-operative
and new infrastructure and consulting firms residents
construction public facilities Contractor Forcible evacuation
Construction builder of resistant residents
of residential,
commercial and
other structures
Property Return of developed City government Transfer of For the sale
transfer properties to Developer reconstructed of developed
property owners, Building housing to property properties to
lessees or tenants contractor owners or tenants buyers, fewer
Sale of developed Property owners Sale of remainder hazards of
housing to third- Tenants of housing information
party buyers Submission of impactedness and
Clearing-off of the project termination asset specificity
whole process and
abolition of the
development agency

plan of urban renewal every 10 years. The main
function of the comprehensive urban renewal
plan is the identification of potential areas
where urban renewal is necessary, with the
provision of sketch plans for the areas. To pre-
pare the comprehensive renewal plan, the city
government procures plan-making services
from a professional planning consulting firm.
Throughout the plan-making process,
diverse stakeholders and parties, including
the city government, property owners and
tenants and non-government organisations
(NGOs), compete for their own interests.
The city officials, who have advantages in
accessing the relevant data and information,
exert strong influence on the selection of the
candidate areas for renewal. More often than
not, certain active neighbourhood leaders
seek to buy off the city officials for their own
favourites. Their rent-seeking behaviour,
which is organised in the cozy relationship
with the city officials, is counteracted by civil
society (Mobrand, 2008). NGOs fight against
the inclusion of too many neighbourhoods as
potential renewal districts. The simultaneous
demolition across wide areas causes massive
destruction of existing dwellings, making it
difficult for the displaced households to find
appropriate housing in the city. The upshot
is housing shortage and the consequent

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12   CHEOL-JOO CHO
escalation in housing prices which pervade
throughout the entire city.
The real contest among the relevant parties
increases uncertainty about which neighbour-
hoods are included in the list of URDs. The
heightened uncertainty provides a seedbed
in which speculative opportunism can thrive.
Speculators who have more reliable inside
information about potential renewal districts,
sophisticated knowledge and experienced
intuition pile up seemingly gifted properties
that would give rise to windfall profits when
they are contained in the renewal district. The
trades between the less knowledgeable prop-
erty owners and the sophisticated speculators
are captured by the latter’s opportunistic
behaviour, which means that the property
owners receive a price that is much lower than
the property’s real development potential.
Designation of housing redevelopment
districts. The next stage is to determine the
housing redevelopment districts, the URDs
for single small projects or the RPZs for
area-wide redevelopment cases, in which the
redevelopment of decayed dwelling units is
practically undertaken within the immediate
foreseeable future. The redevelopment dis-
tricts are selected from the potential renewal
areas which are defined in the comprehensive
urban renewal plan. If an area is designated
as a housing redevelopment district, it means
that housing redevelopment will be ensured
in that district. For this reason, some strategic
residents, especially those who possess many
real estate assets, bribe the influential parties
so that their neighbourhoods are chosen as
housing redevelopment districts.
The final decision of district designation is
a matter for provincial or metropolitan city
governments. In reaching the final decision,
many rounds of feedback take place between
the city government and the relevant provincial
or metropolitan city government. Then, the
prolonged duration of the feedback loops raises
an uncertainty problem, with rent-seeking
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on the part of property owners and tenants
proliferating in the planning market.
On the other hand, the district designation
process stirs up ex post hazards. Specifically,
once the housing redevelopment districts are
decided, internal partitioning of the existing
blighted units and adding extra construction
to them is attempted. Because owning prop-
erties in the housing redevelopment district
means receiving new reconstructed units on
completion of the redevelopment project, the
property owners are tempted to divide their
structures into many small parts or add extra
structures to the existing properties. This
process of moral hazard is intensified with
the entrance of speculators into the market,
which causes the demand for the internally
compartmentalised properties and conse-
quently their prices to escalate.
Project initiation. This stage levels the
ground on which housing redevelopment
is actually carried out. First, the developer
agency that will manage the overall develop-
ment process is formed. The ULEIA defines
two alternative forms of developer organi-
sation. One is the housing redevelopment
association (HRA), which is established by
the approval of more than four-fifths of the
property owners in the relevant URD. To
have legal status, the HRA should obtain
final approval from the city government.
The other is a three-party joint partnership
between the city government, the Korea
Housing Corporation and the HRA. Of these
two forms of developer, most of the urban
redevelopment projects in Korea are carried
out by the former organisation (Ha, 2004).
The important transactions at this stage are
the contracts between the HRA and profes-
sional service firms, through which the HRA
procures the required professional expertise.5
As bidding for the selection of partner service
firms is competitive, there are extensive rent-
seeking activities on the part of professional
firms. In many cases, the rent-seeking

activities are revealed through the disclosed,
cosy relationship between the relevant parties,
with the trade of under-the-table payments
between the developer and the competing
professional service providers (Kyunghyang
Newspaper, 26 October 2009).
On the other hand, once the partner firms
are selected, the relevant parties, including the
HRA, fall into the trap of bilateral monopoly.
As the lock-in interdependence relationships
are established between them, the relevant par-
ties hold out against each other. This results in
an opportunistic behaviour in which one party
threatens other parties to avoid the original
contracts and so take extra benefits; such
behaviour burgeons in the redevelopment
market. All these hazards contribute to the
costly monitoring scheme and consequently
an increase in the overall development costs.
Plan preparation. For the proclaimed
URD, the detailed housing redevelopment
plan should be prepared. In this stage, various
competing parties and agents, including city
government, developer, housing redevelop-
ment firm, property owners and tenants,
planning consultant, building contractor and
social activists, contend around the planning
components. The HRA procures the plan-
making services from the planning consultant
firm that has been selected at the project
initiation stage. Throughout the plan-making
phase, a close alliance between the HRA, the
planning consultant and the redevelopment
consulting firm plays a leading role. In the
process, the city government attempts to exact
the maximum possible amounts of cleared
land for public purposes such as roads, parks,
open space and parking lots. The city govern-
ment’s concern collides with the interests of
the property owners, who fear that, if more
land is designated for public uses, the number
of properties that will be returned to them on
completion of the project is reduced.
Once the planning process is initiated,
the city government and the residents are
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ANALYSIS OF HOUSING REDEVELOPMENT   13
interlocked with each other, falling eventually
into the relationship of bilateral monopoly.
As the uncertainty about final decisions
permeates into the process, many rounds of
planning adjustment and negotiation between
them are iterated. The upshot is that scheming
opportunistic strategies to gain more benefit
increase. In addition, acting on maximising
individual benefits, the property owners and
tenants ask to construct high-rise apartments
to the allowable maximum height, with which
the portions of returned property can be
increased. The residents’ preference for high-
density development coincides with the inter-
ests of the building contractor, who is charged
with financing the project costs, from property
acquisition and clearance through building
construction to administrative expenses.
With high-density development, the builder
can set aside more apartment units for sale in
the market. However, the profit-seeking inter-
est shared between the building contractor
and the residents collides with the attention
of NGOs and city officials. Recognising the
neighbourhood effects that the redevelopment
project would generate across the adjacent
areas, they attempt to lower the heights and
sizes of reconstructed structures.
On the other hand, the interest of civil soci-
ety contradicts that of the property owners,
who regard the location of rental housing
within their neighbourhood as a problem of
not-in-my-back-yard (NIMBY). The pres-
ence of NIMBY undoubtedly indicates that
the hold-up problem is established among
the relevant parties (Deng, 2003). By invest-
ing substantial efforts and resources in the
relation-specific properties of the relevant
project, they cannot relocate their assets to
alternative options.
Finally, housing redevelopment is especially
vulnerable to a problem known as the tragedy
of the anti-commons.6 Seen from the perspec-
tive of housing redevelopment, this problem
means that the mutual distrust and strategic
posturing among the myriads of individual
14   CHEOL-JOO CHO
owners of small parcels prohibit reaching
a voluntary agreement that produces the
net social benefits. In this circumstance, a
third-party intervention could encourage
the collaborative efforts among property
owners. Otherwise, the endemic distrust and
opportunism prevent the creation of desir-
able public features such as the interconnec-
tion of buildings, pedestrian paths protected
from vehicles, open-air concourses, urban
plazas and the mixture of complementary
land uses.
Property acquisition and assembly. On
completion of the detailed action plan, the
HRA begins to assemble fragmented parcels
within the relevant URD. This stage involves
the relocation of and compensation for the
property owners and tenants. If they want
to relocate in the newly constructed housing
after the completion of the project, the build-
ing contractor arranges loans with which they
find temporary residences outside the project
area, in which they live until the project is
completed. In the property acquisition phase,
the HRA often faces a deadlock when the last
property owners or tenants who are disap-
pointed with the redevelopment plan refuse
to transfer their property rights, asking for
further benefits. This situation forestalls the
progress of redevelopment and the conse-
quent prolonged time of negotiation increases
the developer’s costs.
Strongly motivated by the concealed desire
to receive larger gains in financial com-
pensation or more space, some residents’
choice of fierce resistance represents an
opportunistic behaviour that is motivated
by the excess specific assets into which both
the residents and the project management
agencies have invested. To soothe the resis-
tance of the discontented residents, the HRA
and building contractor tend to manipulate
information, understating the profitability
of the redevelopment project. In this way,
the hazard of information impactedness
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intrudes into the transactions between the
residents and the project-managing agents.
Clearance and construction. In this stage,
the existing structures are demolished and
subsequently new buildings, together with
infrastructure and public facilities, are con-
structed on the cleared site. The clearance and
construction works are exposed to a variety
of mixed or idiosyncratic transactions and
related costs.7 The most antagonistic problem,
among others, is the resistance of some prop-
erty owners or tenants to leaving their prop-
erties (Mobrand, 2008). Even a few residents
refusing to evacuate make the progress of
demolition works difficult. If more rounds of
negotiation prove fruitless, the HRA and the
construction company, with the assistance of
the housing redevelopment consulting firm,
forcefully evict the resistant residents from
their properties. In the process, an imprudent
action on the part of the demolition team
fires fierce violence from the last occupiers, at
worst giving rise to loss of life and injury.8 The
violent confrontation between the residents
and the HRA indicates that the negotiation
process of property distribution and compen-
sation is so conflict-ridden that the relevant
parties cannot easily reach an agreement.
Property transfer. On completion of the
new construction work, two processes are
carried out. One is to return the newly con-
structed properties to the original property
owners and tenants who have handed over
their property rights to the HRA, and the
other is to put on the market the market-
rate units that have been set aside for sale.
Through the sale of market-rate units,
the building contractor appropriates the
company’s normal profits and defrays all
the expenses that the relevant project has
incurred. Because the transfer of property
process is conducted following predeter-
mined rules and methods, it generates no
serious frictions and hazards. However, if

a malady of opportunism thrives through
unbridled speculation, the story becomes
different. Speculators with superior infor-
mation win the rights to own property and
earn windfall profits snowballing through
sequential sales to other speculative buyers.
4.2 Transaction Costs and Alternative
Forms of Governance
If transactions are the basic units of the
transaction cost framework, governance
structures are the secondary units. The two
building blocks are bridged by the hypothesis
of discriminating alignment. At the heart of
discriminating alignment is the view of insti-
tutional adaption by which governance struc-
tures are modified to the best match with the
relevant transactions in a least-transaction-
cost way. Configured by the interplay between
autonomous adaption and co-operation
adaption, governance structures diverge into
market, hierarchy or hybrid (Williamson,
1991; Ruiter, 2005). However, the previous
examination of the parties and relevant trans-
actions in housing redevelopment indicates
that they fit neither the perfectly competitive
market nor the pure public hierarchy. This
point implies that the governance mecha-
nisms organised to co-ordinate the process of
housing redevelopment are structured in the
hybrid form. Two hybrid forms of governance
can be distinguished: third-party governance,
on the one hand, and bilateral governance,
on the other (Alexander, 2001a, 2001b,
2001c). The former refers to the institutional
structures which are initiated to support the
governmental administrative activities. It
covers statutory public planning, privatised
planning activities and development control
such as zoning and building regulations. On
the other hand, the latter comprises various
forms of deliberate intervention in the plan-
ning and development market. It includes
direct development by government and its
agencies, public–private partnership, or large
public or private landowner-developer as well
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ANALYSIS OF HOUSING REDEVELOPMENT   15
as voluntary development control such as
contract zoning and contractual covenants
and restrictions.
The transaction cost framework points
out that the extant governance structures
are discriminately aligned with the relevant
transactions. Yet, to the extent that gover-
nance structures continuously adjust en route
for efficiency, the contemporary institutions
necessarily deviate from the best results and
therefore can be appraised at the level of effi-
ciency. Accordingly, in line with the remedi-
ableness principle, more efficient institutions
can be looked for from the alternative forms
of governance feasible within the constraints
of the real context.
Preparation of the comprehensive urban
renewal plan. This stage provokes various
cost-generating transaction hazards, which
are related to opportunism, asymmetrical
information and uncertainty, such as specu-
lation, rent-seeking or long duration of the
reconciliation process. The comprehensive
renewal plan to some degree contributes to
clearing out some transaction-cost-inducing
hazards. Yet it rather stimulates speculative
rent-seeking behaviours in the development
market. As the city government together with
influential neighbourhood leaders dominate
the planning process, the comprehensive
renewal plan is weak at preventing the intru-
sion of opportunism and moral hazards in
order to guard the public interests. As long
as the government connives with the self-
interest-oriented powerful residents and
profit-seeking parties, the contemporary
planning process fails to provide an adequate
public sphere in which multiple claims and
voices are fully recognised and asserted.
The efficiency of comprehensive urban
renewal planning can be enhanced through
the widening of the power base of governance
(Forester, 1999). To this end, the government
needs to rein back its planning function,
constraining the procurement of professional
16   CHEOL-JOO CHO
planning services to pure technical expertise.
While shrinking the role of the professional
consultant lacking organisational capacity
to mediate multiple claims and voices, the
government might empower the different
interests of pertinent stakeholders, includ-
ing NGOs, within the planning process.
Establishing an accessible public sphere in
which the noisy voices and opportunistic
behaviours are contained facilitates the roll-
ing-out of governance boundaries by which
the planning process becomes transparent
and powerful (Healey, 1999). By shrinking the
distance between state and civil society, this
kind of transformative governance will relieve
democratic deficiency to which contemporary
planning is susceptible.
Designation of housing redevelopment
districts. Due to the various legal regu-
lations and the lingering feedback loops
between different levels of government, the
selection of URDs is a very tedious and costly
process. To expedite the selection process, the
ULEIA prescribes several statutory provi-
sions to release many regulatory constraints
imposed by other laws. However, the current
practice of by-passing redundant regulatory
controls is not adequate to fasten the tardiness
of the process. As an additional way to speed
up the process, the removal of provincial or
metropolitan governments from the selection
of URDs might be considered. Reflecting
that the didactic involvement of provincial
governments in local affairs impairs the
spirit of local autonomy and self-reliance, the
devolution of the selection process to the city
government could be a two-birds-with-one-
stone tool: it reduces the relevant transaction
hazards and costs, while enhancing the value
of local autonomy.
On the other hand, to blockade the oppor-
tunistic behaviour of partitioning or expand-
ing the existing structures combined with
speculative activities, extensive monitoring
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efforts are exercised. Yet monitoring alone
does not provide an efficient measure to
contain the fraudulent activities of property
owners and external speculators which are
undertaken in secrecy. Here, information-
enhancing regulations designed fully to
inform the market participants of the pos-
sible gains and losses that the relevant rede-
velopment project generates can provide
a plausible governance structure. Housing
impact analysis (HIA) is an example of this
kind of tool. The HIA process allows the
relevant parties, households and market
participants to achieve a better assessment
of the economic impact of housing rede-
velopment.9 By forcing the disclosure of the
market information which is distributed
asymmetrically among the parties, such
an information-enhancing vehicle renders
useless the incentives for opportunism and,
consequently, contributes to mitigating the
transaction hazards and costs.
Project initiation. This stage involves the
hazards of rent-seeking and illegal bribery
that occur in the process of procuring the
professional services from private firms. The
fundamental source of these transaction haz-
ards stems from the organisational structure
of the HRA. The HRA is usually under the
control of a small group of wealthy property
owners who are politically active. As a result,
the activities of the HRA are neither transpar-
ent nor accountable. Naturally, deceitful and
personally prejudiced contracts are persistent
in the process of outsourcing professional ser-
vices. The corruptive transactions are a crucial
factor that increases the total development
costs. To correct this problem, the ULEIA
specifies the necessary conditions designed
to enhance the transparency of the selection
process of business partners. It enumerates
the standards and criteria for qualifying
professional firms and the requirement of
disclosure of the selection process.

Because the contractual hazards in this
stage occur covertly, however, the legally
mandated deed codes alone are not enough
to ensure surveillance and mitigation. Other
governance mechanisms that can overcome
the problems of special interest capture and
bilateral interdependence need to be consid-
ered. Here, a governance structure in which
the power base is reinforced could provide a
plausible candidate. This can be achieved by
transforming the organisational structure of
the HRA. That is, an extension of the con-
stituent agencies of the HRA to civil society
and local development corporations, which
are the public ventures of equity investment
by provincial governments, will weaken the
undue domination of the HRA by a hand-
ful of powerful residents and profit-seeking
developers. Then, the involvement of civil
society and local public agency in housing
redevelopment will contribute to building
a governance capacity for place-conscious
policy in housing redevelopment. In fact,
places are social constructs, given identity and
infused with value through the experience of
living, working and doing business in them
and through an historical accretion of value
that may sustain an identity (Healey, 1999). In
this sense, the presence of community-based
local public development corporations and
civil society in the HRA, which have promi-
nent place-alert and place-conscious aware-
ness, will greatly contribute to countervailing
the opportunistic and deceitful behaviours of
the private participants.
Plan preparation. To mitigate complicated
hazards and extensive transaction costs,
various planning and development controls
come into play throughout this stage. First,
the likelihood of the city government confis-
cating excess exactions represents a serious
problem in the planning stage.10 When the
government’s selfish opportunism is left
unaccountable, the excess exaction of private
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ANALYSIS OF HOUSING REDEVELOPMENT   17
properties stimulates resistance from the
property owners. To avoid inefficiency caused
by gluttonous city governments, the central
government enacted the 2007 Development
Exactions and Impact Fee Act (DEIFA) to
regulate government exactions. The DEIFA
stipulates the guidelines for determining the
proper amounts of exaction and impact fee
and the types of public facilities to which
exactions are applied.
Given the short period of time after the pas-
sage of the DEFIA, it is too early to evaluate
the effect of the DEIFA regulations. However,
because the primary aim of the DEIFA is to
formalise the convention that governmental
exactions are decided via the informal negotia-
tion between city governments and developers,
rather than to preclude the chances of ineffi-
cient overexaction, the DEIFA regulations are
not enough to counteract the exaction-max-
imising motives of city governments. Here,
the transformative HRA whose power base is
reinforced with the involvement of local public
development corporations and civil society
can again be called upon. By counterbalancing
the competing interests, the reshaped HRA
would contribute to mitigating the transac-
tion costs caused by the greedy government.
Besides alleviating the exaction-related trans-
action costs, a reinforced HRA could provide a
vehicle in which the contradictory preferences
for development density shared among the
residents, constructing company, NGOs and
city officials are reconciled. Within the power-
balanced HRA, the rent-seeking behaviour by
the residents and building contractor could be
contained by the counter-vailing forces of civil
society and city officials.
On the other hand, since the property
owners generally tend to oppose the loca-
tion of affordable housing within their
neighbourhoods, rental units are undersup-
plied within the housing redevelopment
district. To resolve this NIMBY problem,
the ULEIA mandates the portion of the total
18   CHEOL-JOO CHO
housing construction to be set aside for rental
housing. However, with this housing linkage
regulation, unrest among the property own-
ers is not entirely quietened. To appease the
property owners’ opposition, some incentive
mechanisms might be introduced to supple-
ment the mandatory requirements. Typical
incentives include expedited permitting;
offering density bonuses that allow a devel-
oper to develop more densely in exchange for
providing affordable housing; reduction or
waiver of impact fees; and allowing less costly
alternative building methods and materials
(CUES, 2007).
Finally, as a governance structure to avert
the tragedy of the anti-commons, which
is the source of impeding the creation of
quality public spaces and amenities, the
technique of the district unit plan (DUP)
has been introduced into urban renewal.
The ULEIA regulates that the housing rede-
velopment districts shall be overlaid with
the DUP district. The DUP process offers an
incentive zoning system by means of which
private property owners and developers are
encouraged to co-operate to create qual-
ity public facilities and amenities.11 If the
determination of the amount of density
incentive awarded were left to the negotia-
tions between the city government and the
relevant property owners, the allocation of
density awards among the relevant properties
would be biased. To prevent the prejudiced
allocation of density bonuses, the PUNTA
mandates city governments to establish the
strict guidelines and standards. In addi-
tion, the DUP process regulates the detailed
features of site planning and design such as
the layout of dwellings and public facilities,
lot coverage, building façade and colour,
and building height and size. Such detailed
regulations of the DUP process curtail the
self-interest motivation of property owners
as well as building contractors to construct
bulky, externality-generating structures.
However, the DUP process still fails to
reduce the transaction hazards emanating
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from the property right regime in which a
property owner’s rights to exclude others
are too strongly privileged. The incentive
zoning scheme of the DUP process is oper-
ated within a single plot, whereby density
bonuses awarded cannot be transferred across
the separate properties. When unutilised
floor areas cannot be transferred off-site,
the tragedy of the anti-commons problem
remains unresolved. This shortcoming could
be complemented with the technique of
transferring unused development rights,
under which it is possible to transfer unused
floor areas to multiple sites. In this sense, the
special FAR district, which has been used to
preserve the Tokyo Station building, can be
a promising instrument for DUP regulation
(Chorus, 2008).
Property acquisition and assembly. This
stage faces an impasse when some property
owners refuse to hand over their property
ownership to the HRA. The ownership of
land and buildings in Korea is highly frag-
mented and the sizes of individual properties
are very tiny. As a result, a large number of
property owners are involved in the housing
redevelopment project. As the negotiations
for assembling numerous tiny plots are very
prolonged, housing redevelopment turns out
to be a high transaction-cost-generating pro-
cess. As an instrument to attack this problem,
the power of eminent domain is granted to
the HRA. If there are last property owners
who refuse to transfer their ownership, the
HRA can condemn their properties with just
compensation.
However, eminent domain cannot be a
cure-all measure of mitigating such transac-
tion hazards. The most compelling reason
for the refusal of the desperate residents to
surrender their property rights is that their
properties are undervalued and consequently
the portion of benefits that they will receive
after the completion of the redevelopment
project is diminished. So, to facilitate the
ownership transfer, the process in which the

relevant parties to an assessment agreement
negotiate should be enforced. This process-
enhancing regulation can be formulated with
strengthened state and civil society involve-
ment in the negotiation process. That is, it
can be institutionalised by establishing a local
negotiation at which the comprehensive rep-
resentation of relevant stakeholders is ensured
(Richman and Boerner, 2004). By precluding
the option of individual negotiation with
individual property owners but forcing collec-
tive bargaining, this mechanism could curtail
the exclusionary underrepresentation of the
disadvantaged residents in the assessment of
property values.
Then, the aforementioned restructured
HRA with a reinforced power base can be a
governance structure by means of which the
process-enhancing regulation can function.
This means that, with the reshaped HRA,
negotiation externalities, which arise when
individuals have greater incentives to engage
in negotiations individually, will be mitigated
(Richman and Boerner, 2004). By ensuring
balanced negotiations and unbiased diffusion
of information, the process-enhancing gover-
nance can speed up the process of property
acquisition and assembly.
Clearance and construction. A variety of
complicated transaction hazards and costs
that have occurred in the previous stage are
passed on to the clearance and construc-
tion stage. Even though eminent domain
is adopted as a governance mechanism for
property acquisition, desperately dissenting
property owners and tenants who newly join
in this stage unyieldingly refuse to evacu-
ate the properties that they occupy (Hong,
2004). When the fierce resistance continues,
the developer and government more often
than not resort to police operations for forced
eviction. However, the forced demolition
gives rise to more furious violence and vice
versa. No formal institutions to mitigate this
deadlocked situation are currently available.
However, the HRA with the reinforced power
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ANALYSIS OF HOUSING REDEVELOPMENT   19
base whose positive role has been asserted in
various ways throughout the earlier stages
might be called at this stage. As in the previous
stage, the reinforced HRA could contribute to
attenuating any deadly transaction hazards
that occur in this stage.
Property transfer. The closing of the
housing redevelopment process involves
the least cost transactions. If an intrusion
of speculative demands into the property
market does not occur, no serious identi-
fiable hazards and transaction costs exist.
However, when the speculative demands
for the portion of housing that is set aside
for the construction company increase,
the housing price escalates tremendously.
To suppress the price-inflating effect of
speculation, the government enacted a
law to redeem the unearned speculative
profits. That is, the Act on Restitution of
Development Gains (ARDG) was intro-
duced to regulate the recapturing of spec-
ulative windfall profits and the use of
recaptured finance. However, the efficacy
of this law is socially debatable. Given that
the opinions towards the ARDG are split,
it is too early to assess the efficiency of the
law as a governance structure for contain-
ing probable speculative activities.
Thus far, we have examined the discriminat-
ing alliances between the transaction hazards
and the associated governance structures for
each stage of the housing redevelopment
process in Korea. Within the principle of
economising on transaction cost, the various
governance structures seem to be on the way
towards more efficient institutions. Following
Alexander’s (2001a, 2001b, 2001c) classifica-
tion scheme, both the extant and the suggested
governance structures can be categorised into
third-party statutory public planning, third-
party regulatory development control, third-
party privatised procurement of professional
services or bilateral public–private partnership.
Table 2 summarises the one-to-one relationship
between the transaction cost implications and
 Table 2.   Transaction cost implications and relevant governance structures

Form of governance

Transaction cost Third-party statutory Third-party regulatory Third-party Bilateral public–private

Stage implications public planning development control professional services partnership

Preparation of the Speculation Statutory comprehensive

city-wide general Rent-seeking renewal planning
20   CHEOL-JOO CHO

urban renewal The rolling-out

plan governance boundaries
Designation Long duration of Exclusion of regional (or Exemption of regulatory
of housing process metro) governments from constraints
redevelopment Property fragmentation the URD designation Information-enhancing
districts Speculation process regulations (the HIA process)
Project initiation Rent-seeking Standards for qualifying Contracting- The HRA
Illegal bribery professional firms and out professional The three-party
transparency services partnership as
developer
The reshaped HRA
(both power-based and
place-conscious)
Plan preparation The tragedy of the anti- Statutory housing Incentive zoning The reshaped HRA
commons redevelopment planning Standards for government (both power-based and

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Poor public amenities Planning for the DUP exactions place-conscious)
Excess exactions process Mandatory provision of
NIMBY problem The TDR-type Special rental housing
FAR Applied District Housing linkage requirements
combined with incentive
systems

Property Extended duration of The power of eminent The reshaped HRA

acquisition and negotiations domain (both power-based and
assembly Negotiation externalities Process-enhancing regulations place-conscious)
 ANALYSIS OF HOUSING REDEVELOPMENT   21

the corresponding governance structures, both

Bilateral public–private

(both power-based and

Note: The governance structures in italics represent institutions suggested as an alternative mechanism with which the relevant transaction costs could
extant and newly suggested.

The reshaped HRA

place-conscious)
5. Conclusions
partnership

The traditional standard of efficiency, the

Pareto criterion, is to compare the ideal
alternative and the real and, if discrepan-
professional services

cies between them are found, it concludes

evacuation works
out compulsory

that the real is inefficient. This viewpoint

Contracting-

has intuitive appeal. However, given the real

Third-party

world of positive transaction costs, the Pareto

criterion is simply an unattainable normative
Form of governance

norm in practice. By contrast, the transaction

cost framework offers a much more practical
method of assessing economic efficiency. That
Recapturing of speculative

is, by juxtaposing transactions and governance

Third-party regulatory

structures, it identifies the degrees of accord

development control

between them in terms of the least transaction

costs, whereby the efficiency of alternative
windfall gains

governance mechanisms can be assessed.

This paper applies the transaction cost
framework to the analysis of the housing
redevelopment process in Korea. It reveals
that the housing redevelopment process
raises various identifiable transactions and
Third-party statutory

cost-incurring hazards which originate from

uncertainty about property development
public planning

potential and effects, interdependencies and

the consequent strategic choices of relevant
parties. The various transaction costs identi-
fied include parties’ opportunity costs arising
from delays of the process due to prolonged
negotiation and planning decisions, parties’
against evacuation

direct costs such as information costs, costs

Violent resistance
Transaction cost

of monitoring rent-seeking, speculation and

implications

Speculation

illegal bribery, and costs of enforcing the

implementation of agreed contracts, and
stakeholders’ direct and opportunity costs
Table 2.   (Continued)

resulting from their participation, exclusion,

be further mitigated.

and violent resistance.

existing structures

Property transfer

Responding to the characteristics of these

transactions and hazards, on the other hand,
construction
Clearance of

various forms of governance structure are

and new

institutionalised. The analysis indicates

Stage

that neither the perfect market model nor

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22   CHEOL-JOO CHO
pure hierarchy fits the extant mechanisms
of governance, but rather, hybrid forms of
governance organised across the public and
private spheres are aligned with the relevant
transactions. In this respect, the transaction
cost analysis of housing redevelopment in
Korea echoes Alexander’s (2001b) assertion
that the dichotomous division of planning vs
market is not a genuine reflection of reality.
Meanwhile, with different forms of gov-
ernance structure for different stages of the
housing redevelopment process, most of the
extant governance structures appear to fail
to achieve an attainable maximum efficiency.
Then, the remediableness test is conducted
to find alternative governance forms which
are more efficient than the current ones. The
test results show that, for several stages, a
handful of identifiable forms of governance
could further reduce the transaction costs and
hence improve the institutional efficiency of
the housing redevelopment process in Korea.
The plausible alternative governance forms
comprise rolling-out governance boundar-
ies, information-enhancing regulations,
process-enhancing regulations, power- and
place-based organisations, and housing link-
age requirements.
The outcome of institutional analysis as
applied to housing redevelopment in Korea
presents a robust advantage of the transac-
tion cost approach with respect to assessing
process efficiency, refuting the Pigouvian
argument that the market form of governance
is more efficient than the hierarchical public
organisation, or vice versa. It confirms the
inappropriateness of a one-size-fits-all cri-
terion as the correct account for the validity
of governance structures. Accordingly, the
right statement of institutional efficiency is
not that one form of governance is efficient
for the whole process of social undertaking,
but that in stage A, governance structure X
mitigates more efficiently than governance
form Y, whereas in stage B, governance K
is more efficient than governance L. From
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the perspective of institutional analysis,
a splintered explanation of institutional
efficiency like this can be extended to other
cases of social undertaking, whether public
or private, if their process is composed of
a series of distinctive stages. The potential
of extended application represents a superb
merit of the transaction cost framework that
the Pigouvian approach does not possess.
Notes
1. The term planning is here used to comprise
a broader scope of hierarchical organisations
with the deliberate social or organisational
activity of developing and deciding on
strategies for future action, including, of
course, public intervention. Its institutional
structure is then opposed to the market form
of contractual exchanges, which are guided
by unplanned and spontaneous decisions of
the participants in the market transactions
(Alexander, 1992).
2. The transaction cost framework is derived from
Coasian transaction cost economics, which is
predominantly concerned with economising on
transaction costs and explaining economic co-
ordinating mechanisms. It draws its inspiration
from Coase’s (1937, 1960) pioneering work, but
its theoretical and methodological foundations
are established by transaction cost economics’
founding father Williamson (1991, 2000,
2002). Williamson (1999) further crosses its
threshold with initial exposition in the private
sphere to the public sphere.
3. Transaction costs here refer to all costs other
than the costs of physical production. Then,
the transaction costs are inherent in all kinds
of transactions whether in markets, or public
planning and development. Coase (1960)
specifically refers to the legal and administrative
costs associated with locating relevant parties
to a market transaction, establishing the
proper terms for the transaction, conducting
necessary negotiations, drawing contracts,
undertaking inspections necessary to monitor
compliance with the terms of ownership
agreements and anything else that introduces
friction into an economic transaction.

4. Besides these three, other attributes are
sometimes indicated. For example, Birner and
Wittmer (2004) consider effort intensity and
contest intensity as the additional attributes
of transactions that occur in natural resource
management. On the other hand, Richman
and Boerner (2004) refer to negotiation
externalities, measurement problems and
asset specificity as the key dimensions of
transactions with regard to the location of
waste facilities. In a different context, regarding
sovereign tasks like foreign affairs, the military,
foreign intelligence and so on, Williamson
(1999) introduces a further attribute termed
probity to refer to the loyalty and rectitude
with which vertical, horizontal and internal
relations of a public agency are determined.
5. The professional service providers with which
the HRA contracts include urban renewal
consulting firms, planning consultants and
building contractors.
6. Abstractly speaking, the tragedy of the anti-
commons occurs when multiple owners of some
property hold effective rights to exclude others
from the use of a scare resource, and hence no
one has an effective privilege of its use (Parisi
et al., 2004). The property owners’ rights of
exclusion but insufficient rights to maximise
the use of the property eventually lead to an
underuse of the resource tantamount to waste.
7. In managing the construction project
of housing redevelopment, the major
construction company contracts out with
many construction-related firms. Complicated
contracting uncertainties and hazards prevail
within and between the relevant firms.
Accordingly, the transaction cost framework
can be applied for the analysis of construction
management itself (Winch, 1989; Walker
and Wing, 1999). Since the structuring
and management of construction project
organisations are beyond the scope of this
paper, however, the construction-related
transactions and hazards are not analysed here.
8. T h e c a s e o f t h e Yo u n g s a n h o u s i n g
redevelopment district in Seoul is an example
of physical confrontation between the resisting
residents and demolition squads leading to
deadly catastrophe. On 20 January 2009,
harsh methods of eviction were used and five
residents and one demolition squad member
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ANALYSIS OF HOUSING REDEVELOPMENT   23
were killed (Kyunghyang Newspaper, 5 October
2009).
9. The HIA process has been suggested to assist
governments to develop sound policies
regarding the impact of proposed regulations
on the affordability of housing in the US
(Dacquisto and Rodda, 2006). However,
it can be used as a tool for estimating
and disseminating the impact of proposed
redevelopment projects on housing costs,
affordability and housing markets.
10. This view fits the public choice analysis of
government behaviour, which opposes the
Pigouvian principle that ignores the welfare-
maximising motives of government itself.
The exaction-maximising municipality that
brings about socially inefficient outcomes
disproves the validity of the benevolent
bureaucrat assumption of Pigouvian analysis
(Webster, 1998).
11. Under the DUP process, bonuses in development
density are provided as-of-right to developers
who meet the requirements for public amenity
set out in the DUP plan. Then, developers
within the DUP district donate part of their
site for public purposes in exchange for the
density bonus that will be used in the rest of
the site (Cho, 2008).
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