Auction theory has developed as a branch of game theory in the economic literature. Through the development of sophisticated auctioning mechanisms, auction theorists have been able to come up with ways to allocate goods and services to their highest-value users. Well-designed auctions accomplish this result by decoupling a bidder’s bid from the price she will pay if she wins. Auctions based on decoupled bids have a unique ability to reveal private information and overcome information asymmetries. Furthermore, they have the potential to do so at a lower cost than conventional market transactions.
In this Article, we seek to harness the insights of auction theory to devise an improved governance model for commoninterest communities, perhaps the most important real-property form today.
The rise of the common-interest community has transformed the landscape of residential property in the United States. In 1970, only 2.1 million Americans lived in commoninterest communities—condominiums, cooperatives, and various other mixtures of common and private ownership in a single real estate development. Today, that number exceeds 60 million. Common-interest communities have become the favorite property form of developers. In California, for example, 60 percent of all new residential construction in the 1990s fell into this category. This trend is unlikely to change in the future.
A salient feature of common-interest communities is their dependence on collective-choice mechanisms to manage the affairs of the members and plan future development. The most common mechanism used for this purpose is voting. Voting, while eminently democratic, can also lead to choices that do not fully represent the interests of constituents. The preferences collectively expressed through voting can be unstable, manipulated by chairpersons who strategically dictate the order of votes, and subject to majority oppression of minority interests. Up-ordown voting is also insensitive to the intensity of preferences, so that a wave of indifference can overcome the intensely desired wishes of a small number. Proposals may be strategically crafted in order to allow some to free ride on the preferences of others. Collective decision making, when delegated to representatives, can also fall prey to the well-known agency problem: representatives may prefer their own interests to those of their constituents.
In this Article, we suggest that well-designed auctions can provide common-interest communities with a better decisionmaking mechanism. An auction’s main advantage over voting lies in its ability to reflect the intensity of participants’ preferences. At the same time, auctions avoid many of the strategic manipulations and much of the minority oppression to which votes are prey. Although auctions come with their own imperfections, in many cases they outperform voting.