Ryan Avent suggests, in response to a fierce battle over a DC neighborhood plan, that neighborhoods be offered NIMBY insurance:
[I]s there a market for NIMBY insurance? That is, I’d love to collect tiny premiums from residents looking at potential development near their homes, in exchange for which I’d take responsibility for the change in value of their home relative to homes outside of the directly affected area. If their property does poorly relative to other homes, then I’d shell out for the difference, either at an agreed upon time after development or upon sale. If it does better, well, the gain would accrue to me.
A city that was confident that it was developing well could even offer this kind of service at a deep discount relative to what the private market would likely ask. It might help combat knee-jerk opposition to development plans, and since NIMBYs seem, to me, to be bad at gauging the effect of development on their property values, it would be a nice source of revenue. And of course, if the government ended up being totally wrong, homeowners would be protected.
Both Robert Shiller (the "Shiller" in the Case-Shiller index) and William Fischel (Dartmouth economist) have proposed similar insurance schemes in the past, although Shiller's was not tied to specific development projects. Fischel set out his proposal in the Homevoter Hypothesis.
This is sound in theory. Homeowners' risk aversion is an obstacle to optimal city development policy. It's hard to make this work in practice, though. First, one needs an index to measure whether a property is doing poorly "relative to other homes." One can think of the Case-Shiller index as an attempt to construct such a measure, but I don't think it's fine-grained enough to detect variations in neighborhood values.
A bigger problem is moral hazard. New developments can pose risks to property values, although homeowners do indeed systematically overestimate these risks. But lots of other things affect property values as well -- rising crime, deteriorating appearance (trash, graffiti), deteriorating school quality. (Childless households have an incentive to worry about school quality because it affects their property values, too.) Some neighbors have tended vacant, foreclosed homes out of a concern for their own property values. Insuring homeowners against the impact of new developments would give them less incentive to worry about the impact of other variables under their control. It would be impossible to separate these other influences from the impact of development.
Finally, neighborhoods also experience secular declines. Cities are dynamic places, and change is often chaotic and turbulent. Neighborhoods, blocks, even individual streets can get caught in little eddies created by this turbulence. They can improve or deteriorate relative to the rest of the city for no observable reason. Small, random events can cause one neighborhood to gentrify and another to go into a tailspin. This unpredictability would make it very hard to accurately appraise the risk of a new development. Even assuming the risk could be accurately estimated, insuring against the impact of a given development might very well require insuring against change itself. That would be a much more expensive insurance policy. It's not one that many developers (or cities) would be willing to underwrite.
