Decentralisation, Decision Rules and Residential Construction in Yugoslavia

Yugoslav planners have not been able to organise the volume of residental construction to their satisfaction. This paper notes two fundamental reasons for their difficulty. One route to an optimal amount of residential construction requires that decision-making be vested in administrative units which would not accord with political boundaries and which would have no historical antecedents. In the absence of such districts, existing administrative units would always build the correct amount of housing if they followed a particular decision rule, to maximise the social rate of return on the savings, including taxes, of their constituents. Planners have good, economic reasons, however, for choosing a different decision rule, maximising the income of their constituents. Both routes to an optimal housing policy are, therefore, effectively blocked, which is the first reason for the dissatisfaction of the planners. A second reason must lie in the relatively high cost of construction. The empirical estimates of this paper, crude though they are, suggest that the planner must stifle his wish to encourage housing construction, for, at current costs, this would lower the national growth rate.