UNCERTAIN NEIGHBORHOOD EFFECTS AND RESTRICTIVE COVENANTS

This paper provides a theoretical model and empirical analysis of priv ate land use contracts in an urban housing market. One contribution of our analysis lies in the explicit treatment of neighborhood externali ties as uncertain processes; the potential resident views the contract ual obligation established by deed restrictions as credible commitment by unknown future neighbors to utilize their own property within the defined bounds, thereby reducing the uncertainty or riskiness of futur e externality effects. Following this view, we present a hedonic valua tion model for deed restrictions and neighborhood covenants to tie hou sing consumption risk theory to the empirical hedonic method. We then use a unique land use contracts data set to test the model implication s. (C) 1996 Academic Press, Inc.