Cities 137 (2023) 104291

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Cities
journal homepage: www.elsevier.com/locate/cities

Pro profits or non-profits? A principal-agent model for analyzing public

sector planning decisions and empirical results from planning applications
in Hong Kong
K.W. Chau a, *, Lennon H.T. Choy a, Mark H. Chua c, Lawrence W.C. Lai a, Esther H.K. Yung b
a
Ronald Coase Centre for Property Rights Research, HKUrbanLabs, The University of Hong Kong, Hong Kong
b
Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong
c
Institute of Policy Studies, Lingnan University, Hong Kong

A R T I C L E I N F O A B S T R A C T

Keywords: This paper introduces a principal-agent analysis of the public sector decisions made by a non-democratic
Planning applications planning body under public scrutiny. The central idea is that divergence between the interests of the principal
Principal-agent problem (citizens), whose objective is to maximize the total value of the land in Hong Kong, and the agent (planning
Approval risk
approval authority), whose concern is about Approval Risk, which is the agent’s risk of being accused of collusion
Logistic regression
Pseudo R2
or even bribery. This principal-agent analysis can be applied to any public-sector decision-making process in a
Land use society with the rule of law and freedom of speech. It was found by a logit analysis of 1440 sets of disaggregate
Community use data that planning applications by non-profit applicants for uses in Government/Institution/Community (GIC)
zones were more likely to be approved than those by for-profit private organizations, in line with the idea of a
lower perceived Approval Risk. Amongst the applications by private organizations, proposed high-value land
uses were less likely to be approved than those proposed for low-value uses, probably because the former results
in potentially higher economic gain for the applicants. The legislative change that took effect in July 2005 has
allowed a wider public participation in the planning application process. This policy change was used in this
study as a test condition for the effect on planning approvals of an increase in the principal’s involvement in the
decision-making process. It was found that the policy change did increase the success rate of planning appli­
cations made by private organizations, though the impact was mainly on the applications for low-value land uses
only. The empirical result shows that the perceived Approval Risk for high-value land uses was too high to be
affected by the policy change.

1. Introduction hegemony” and “land oligarchs” have cropped up in the literature to

When land originally allotted for government, community or insti­
tutional (GIC) uses is proposed for conversion to residential or business
uses, there is often strong public reaction against such changes, and
these may have an effect on the decisions of planning authorities. How a
planning body is influenced by public opinion is an unresolved issue. An
earlier work by Lalli and Thomas (1989) showed how public opinion
may directly influence local town planning decisions.
When a piece of land allocated specifically for a “public use” is
proposed for use for a private purpose, eyebrows go up and a public
outcry may be heard. One usual reason for this is the distrust of de­
velopers. In high land price Hong Kong, pejorative terms like “real estate
refer to developers (Poon, 2005; Wong, 2015). “The [Hong Kong Special
Administrative Region] government is assumed to favour big developers
and design its policy to maximize its land revenues,” (Haila, 2017, p
503). It may also be a general suspicion of the capitalist approach
mentioned by Hayek (1944).
This suspicion is also felt in the US. In a survey done in the high
density city of Los Angeles, Monkkonen and Manville (2019) found that
reminders or hints about “developer’s profits” in the questionnaire seem
to solicit from respondents a strong opposition to development. Even
when government officials give some form of exemption to a developer
despite that being within their competence, it may be viewed as cor­
ruption and may induce revolt (Manville & Osman, 2017). Manville and

* Corresponding author.
E-mail addresses: hrrbckw@hku.hk (K.W. Chau), lennonchoy@hku.hk (L.H.T. Choy), markchua@ln.edu.hk (M.H. Chua), wclai@hku.hk (L.W.C. Lai), esther.
yung@polyu.edu.hk (E.H.K. Yung).

https://doi.org/10.1016/j.cities.2023.104291
Received 26 August 2021; Received in revised form 5 March 2023; Accepted 9 March 2023
Available online 29 March 2023
0264-2751/© 2023 Elsevier Ltd. All rights reserved.
K.W. Chau et al.
Osman (2017) noted that some revolts were aimed more at transferring
discretionary power of approving some exemption to developers from
the politician to the people.
This distrust can be put into proper context by empirical work. For
instance, countering the usual belief that Hong Kong developers jacked
up prices of flats they sell, Wong et al. (2019) found that prices of first-
hand flats sold by developers are at a discount compared to the prices of
the same flats sold in the second-hand market after a couple of
years—having adjusted for depreciation. Another study gave examples
wherein government policies have restrained giant developers by pitting
them against each other (Wong, 2015). Nevertheless, the image of some
developers in the news print media and other housing experts has his­
torically been very negative if not hostile (Ley & Teo, 2014).
In Hong Kong, redevelopment of church property by a developer into
a residential block has experienced some community conflict despite the
re-provision of a church in the lower portion of the building (Yip et al.,
2020). Acquisition and the eventual redevelopment of utilities like
power plants or bus depots into large private residential blocks is also
seen as a maneuver to acquire strategically located urban land by de­
velopers (Poon, 2005). Researchers often neglect the point that de­
velopers are interested in these urban sites (zoned GIC, if not
Comprehensive Development Area (CDA)) as they are large, well-served
by roads and above all, usually under unitary ownership.
Given these politically and socially sensitive issues regarding such
land use conversions, it is interesting to understand how non-elected
Town Planning officials behave in such tricky cases. In a sense, both
researchers and the public tend to see GIC land as if they are food vac­
uoles1 of greedy developers.
This paper is a pioneer attempt to use the neo-institutional concept of
the principal-agent problem to predict the behavior of Town Planning
Board (TPB), the planning approval authority in Hong Kong, regarding
decisions on applications to change GIC sites to other uses under
different degrees of public participation. A GIC zone is intended to
provide facilities like schools, hospitals, public sports areas, and other
government or community amenities to different districts or adjoining
districts. When planning applications are made for changes to any zone’s
uses, the TPB is expected to have regard to public opinion and distrib­
utive justice.
The paper is organized as follows: Section 2 presents a review of the
application of the principal-agent model to planning studies. Section 3
describes the town planning system in Hong Kong, as an institution, to
provide a context to the study. Section 4 presents a principal agent
model and Section 5 details the hypotheses and methodology. Section 6
presents and interprets the empirical results. Section 7 is a discussion
and the last, Section 8, concludes the study with a few
recommendations.
2. The application of the principal-agent concept to urban and
planning studies
According to Nobel Prize winner Stiglitz (1989), the principal-agent
concept refers to the politico-economic dynamics between the principal
(e.g. an employer, a landlord) and an agent (e.g., employee, tenant) that
act according to the principal’s interest. Stiglitz (1989) attributed the
first use of the term principal-agent problem to Ross (1973). Jensen and
Meckling (1976) illustrated the concept in one of the most cited papers
in finance by pointing out that the incentives of executives, who tar­
getted short term profits and hence higher remuneration packages,
might be incompatible with those of the owners, who aspired to long
term growth of their companies. More than a theory, Gailmard (2012)
describes principal-agent problems as a family of models wherein the
principal and agent are identified to see how they affect each other.
1
https://biologydictionary.net/food-vacuole/. Here the term refers to land
banks of developers.
2
Cities 137 (2023) 104291
Principal-agent problems have been used to analyze contractual ar­
rangements in varied economic relationships: doctor-patient (Scott &
Vick, 1999), owner-lessee (Marks-Bielska, 2021), insurer-insured (Sti­
glitz, 1989), legislator-bureaucrat (Campbell & Turnbull, 2003; Con­
nolly, 2017; Sager & Ravlum, 2005; Waterman & Meier, 1998), federal-
local planning agencies (Chen, 2007), and school districts-school sites
(Ferris, 1992).
In urban and planning studies, the principal-agent framework was
applied to examine central government restrictions on quasi-
autonomous municipal plans in different countries (Huang et al.,
2019; Strand & Næss, 2017); to a federal transport planning agency
designing incentives for local transport agencies to align to federal goals
(Chen, 2007); to analyze the interaction between elected officials and
hired professional county managers (Campbell & Turnbull, 2003; Con­
nolly, 2017) or professional experts like transport planners (Sager &
Ravlum, 2005). It has also been used to analyze incentives for envi­
ronmental remediation (Zhang et al., 2018; Sheng et al., 2017; Permadi
et al., 2017; Weber, 2015); land utilization programmes (Marks-Bielska,
2021; Shi et al., 2018) and privatization schemes (Coats, 2002; Van
Slyke & Hammonds, 2003).
Two elements are of particular importance in a principal-agent
relationship, (a) the information asymmetry between the parties; and
(b) the possibility of conflict or agreement between them (Ross 1973;
Stiglitz, 1989; Waterman & Meier, 1998; Gailmard, 2012). In many
scenarios, this information asymmetry may be described as a two-edged
sword. Indeed, the principal engaged the agent precisely because the
agent knows something the principal does not, such as the agent’s
expertise for example, in order to achieve the principal’s goal (Stiglitz,
1989). On the other hand, the information asymmetry may also cause
conflicts or misalignment of goals between the two parties, which un­
dermines the principal’s objective. For instance, the data requirements
for a regional policy system to work—principal-agency scenario—is an
important area of study (e.g. McVittie & Swales, 2007).
In order to cover the breadth of this family of models (Gailmard,
2010), Waterman and Meier (1998) expanded and framed the analysis
into eight scenarios wherein the principal and the agent have different
combinations of information and conflict/consensus with respect to one
another.
In this study the citizen is the principal while the TPB is the agent. We
position this study after Gailmard (2010) in considering that the agent is
better informed than the principal, and that the agent may or may not
have any motivation to offer better service, especially where the
approving body is not elected. On 10 June 2005, this relation was
further emphasized when planning applications were open for the first
time to public viewing and comments, in line with the principal’s
policing paradigm expounded by Mitnick’s (1975) seminal paper. Using
social media as a tool of communication between citizens and the gov­
ernment, Bonsón et al. (2017) reported that these interactions would
weaken the agency conflict between the two parties.
3. An outline of the Hong Kong planning application system
Since its enactment in 1939, the Town Planning Ordinance has
enabled the TPB to provide for the imposition of Hong Kong Outline
Zoning Plans (OZPs) for “existing and potential urban areas”. These
plans, which began to emerge in the 1960s but were only legally valid
for those plans made after 1976, delimit what types of land uses are
always permitted or may be permitted on application to the TPB in the
area they cover. Land parcels allotted for government or community
facilities are normally designated as GIC zones.
Table 1 shows a sample table from the “Notes”2 of an Outline Zoning
2
Expressly “to form part of the plan”, these Notes are distinct from the
“Explanatory Statement” that expressly “does not form part of the plan.” Some,
who are confused, call the former “explanatory notes”.
K.W. Chau et al. Cities 137 (2023) 104291

Table 1 A natural experiment that happened in 2005 has enabled us to

Examples of Columns 1 & 2 uses for a GIC zone. investigate the effects of greater public participation on the intertwining
Column 1 Column 2 principal-agent relationships in the regulated urban development mar­
ket. After June 9, 2005, the Town Planning Ordinance has empowered the
Uses always permitted Uses that may be permitted with or without
conditions on application to the Town Planning general public so that they can access details of, comment on and raise
Board objections to planning applications. This raises the question of whether
Eating place (canteen, cooked Animal boarding establishment the agent we posit, the approving authority, has been behaviorally
food centre only) affected by such a change in institutional arrangements? In March 2022,
Educational institution Animal quarantine centre (not elsewhere
specified)
a U turn appears. The government expressed its intention to curtail
Exhibition or convention hall Columbarium public participation allowed for over the years since 1990. Is this merely
Field study/education/visitor Correctional institution a move to suppress public opinion or rather a means to constrain rent
centre seeking in planning so as to speed up the planning process?4
Place of recreation, sports or Crematorium
culture
Public transport terminus or Eating place (not elsewhere specified) 4. A principal-agent framework for interpreting planning
station authority decisions
Public utility installation Flat
Public vehicle park Funeral facility The behavior of the TPB as public planning approval authority is
(Excluding container vehicle) Holiday camp
Recyclable collection centre Hotel
subjected to the constraints of public accountability and the relevant
Religious institution House institutional structure. The application of principal-agent theory in the
School Petrol filling station study of public accountability is not new. Many examples of these
Service reservoir Place of Entertainment studies can be found in Besley and Case (2003), Miller (2005) and
Social welfare facility Private club
Gailmard (2012). While most of these studies examine the principal-
Training centre Shop and services
Wholesale trade Utility installation for private project agent problem between citizens and the government in a democratic
society (e.g. Fearon, 1999; Ferejohn, 1986), the analysis can well be
extended to non-democratic system (Besley, 2006; Besley & Kudamatsu,
Plan for a GIC zone. The table consists of two columns showing two types 2007; Sng, 2014). The government’s behavior is not only constrained by
of uses: those under Column 1 are always permitted and those under citizen’s voting rights. In a society with freedom of the press and the rule
Column 2, other than existing or exempted uses (Lai & Ho, 2017), would of law, the behavior of politicians and authorities are also shaped by the
contravene the Buildings Ordinance unless, after an application to the information flow from the media (Besley & Burgess, 2001). We present
TPB, an approval is given to proceed with the proposal. below a principal-agent analysis of how the decisions of the TPB mem­
The Notes further state that this type of zoning is “also intended to bers in Hong Kong are shaped by potential reaction of the media and
provide land for uses directly related to or in support of the work of the increased public participation.
Government, organizations providing social services to meet community In a statutory planning system, a planning application mechanism is
needs, and other institutional establishments,” As can be seen, residen­ a non-price allocation process used by a land user (typically a developer)
tial and commercial developments are both in Column 2, which entails to obtain or recapture development rights on land subject to a statutory
acquiring town planning permission prior to development. plan.
Whenever a developer would like to change a present use in a The TPB is made up of official members and unofficial members
particular land parcel within a GIC zone to a Column 2 use, it would appointed by the government. They comprise mostly built-environment
need to make an application under section 16 of the Town Planning related professionals and representatives of major stakeholders in the
Ordinance. These “section 16 applications”—as they are called—are society. Supposedly, decisions made by the TPB in approving or reject­
submitted to the TPB for approval. Once approved a developer can ing a planning application should take into account various constraints
proceed with processing the land lease modification and building plan and impacts so as to minimize or internalize negative externalities.
approval. Without the approval from the TPB, the Building Authority We conjecture that TPB is a government agent acting on behalf of
(according to section 16(1) (d) of the Building Ordinance) MUST reject their principal (all Hong Kong citizens) in granting or refusing devel­
the building plans even if the land lease allows for such development3 opment rights to land users in the planning application process. We start
(Lai & Fong, 2000; Lai & Ho, 2017; Nissim, 2016). with the premises that the objective of the principal is to maximize the
Except for a very few land parcels, land in Hong Kong is and has net total value of land (after adjusted for all negative externalities
always been owned by the government. It follows that the planning imposed by various land uses) in Hong Kong. Intuitively, this can be
system operates within a leasehold land system as that was first estab­ justified by the fact that all lands in Hong Kong are owned by the gov­
lished in 1842. In the past, before the present planning system came into ernment and allocated for private uses in the form of leasehold interests.
being, some leasehold land was granted to certain not-for-profit, or Land revenue has been a major source of government income, which is
religious, organizations, or organizations oriented to some social and needed for the provision of social welfare and public goods. Other,
community services. In not so few cases, such land leases had been long personal tax rates in Hong Kong, e.g. salaries tax and the absence of any
established so, logically, due to their established use, many of were general sales tax, have been kept at a low level partly due to the huge
zoned GIC when an OZP was subsequently imposed on the leasehold revenue from land sales and premiums charged by the government for
land. change of land use.
As the city grew economically, the values of the competing land uses The members of the TPB are either built environment professionals
of these sites under GIC zones escalated. Demands for changes in land or government officials. The non-government members are appointed by
use for these sites by the land lease holding organizations, either being government on a pro bono basis. The TPB is empowered to make de­
developers themselves or in conjunction with other developers in joint cisions on land development in Hong Kong, which has a potentially
ventures, and expressed via the local planning application system, are a substantial wealth distribution effect. One factor that the TPB members
natural consequence of city development. will take into consideration is whether their decisions may be perceived
to have benefited one or more private individuals or organizations,

3
Uses developed according to terms in the lease are “existing uses” under any
4
statutory plan imposed on the land after their development. https://news.rthk.hk/rthk/en/component/k2/1639277-20220316.htm.

3
K.W. Chau et al.
which may attract adverse public attention. The outcomes of their de­
cisions are transparent to the general public and can be easily monitored
by the media. The risk facing the TPB members is that of being accused
of collusion or even bribery when a decision appeared to have benefitted
a private applicant, which is termed Approval Risk. The accusation may
not have any legal consequences but could damage the reputations of
the non-government TPB members, who have their own professional
careers or businesses but serving on the TPB on a part-time pro bono
basis. One of the TPB’s objectives that is not in line with that of Hong
Kong’s citizens is that of minimizing the Approval Risk when making
decisions on planning applications. We conjecture that this is the main
source of the principal-agent problem that exists between the TPB as an
agent and Hong Kong’s citizens as the principal.
Most TPB members are built-environment related professionals, they
have an edge in information and knowledge about the implications of
planning applications over ordinary citizens and can potentially make
more informed decisions than ordinary Hong Kong citizens, especially in
minimizing potential negative externalities. However, in practice, sub-
optimal decisions for the citizens may be made due to the existence of
the Approval Risk.
The principal-agent problem is further aggravated by the fact that
the TPB members are appointed without any public consultation rather
than democratically elected. Given this non-democratic institutional
setting in a society with rule of law and freedom of expression, the
agent’s interest may not be aligned with that of the principal if the
agent’s decisions to approve a planning application may increase the
agent’s own risk (Approval Risk) of being publicly accused of collusion
with the applicant for planning permission or even of corruption.5
The Approval Risk as perceived by the TPB is higher if their decision
can result in substantial potential gain in wealth for the applicant, even
if the decision can achieve a Pareto gain (i.e. a win-win situation). We
further conjecture that the perceived Approval Risk arising from this
principle-agent problem can be lowered by increasing participation by
the citizens in the planning application process, since this can empower
the TPB to make decisions that are beneficial to the citizens despite such
decisions may also bring finance gain to the applicant. This view is
contrary to the recent government idea of curtailing public
participation.
The above principle-agent analysis is used to predict the behavior of
the TPB in making decisions on planning applications for change of land
zoned for GIC use to other uses. These predictions are stated as testable
hypotheses in the next section.
5. Hypotheses and methodology
This section presents three refutable hypotheses derived from the
principle-agent analysis presented above and the method of testing the
hypotheses.
5.1. Hypotheses
The three empirical hypotheses and their rationales are as follows:
Hypothesis 1:
H1. Applications for changes in use of land in Government, Institu­
tional or Community (GIC) zones to public or community uses are more
likely to be approved than those for change to for-profit private uses.
Public or community uses are typically applied by NGOs or non-
profit making organizations for erecting hospitals, schools, churches
etc. It is postulated that public uses do not result in private economic
gain by the applicants and therefore incur substantially lower Approval
5
The public’s (principal’s) understanding of corruption in this context is
likely to be markedly looser and more general than what is legally defined in
Cap 201 Prevention of Bribery Ordinance (1971) as an ‘advantage’.
4
Cities 137 (2023) 104291
Risk for the TPB. Public or community land uses are therefore hypoth­
esized as more likely to be approved by the TPB, other things being
equal.
Hypothesis 2:
H2. Applications for changes in use of land in Government, Institu­
tional or Community (GIC) zones to low-value for-profit private uses are
more likely to be approved than those for change to high-value for-profit
private uses.
High value pro-profit private uses under Column 2 include colum­
barium, hotel, commercial (retail), office and residential use. Low value
private uses under Column 2 include storage, carpark and petroleum
refilling station. Since the potential economic benefits of obtaining ap­
provals for high-value private use are much higher than those for the
low-value land uses, the Approval Risk should be higher for high-value
land uses and therefore less likely to be approved by the TPB, other
things being equal.
Hypothesis 3:
H3. Applications for change of land zoned for Government, Institu­
tional or Community (GIC) to for-profit private uses are more likely to be
approved with an increase in public participation.
An increase in the involvement of the public in the planning appli­
cation process through public participation can reduce the principal-
agent conflict since the principal can have more influence on the de­
cisions by the TPB. As mentioned previously, there was a legislative
change after 9 June 2005, which has increased the scope of public
participation substantially. This institutional change allows us to test the
hypothesis empirically. As a result, the perceived Approval Risk should
be lower after the policy change and therefore private uses be more
likely to be approved after 9 June 2005, other things being equal.
5.2. Data
Non-aggregate data of planning applications from 1975 to 1999 were
manually collected from the Planning Department and those from 2000
to 30 June 2020 from its website. These data cover the location, size, use
and status of the projects. A total of 4403 planning applications for
changes in use on sites under full or partial GIC zoning were identified.
These applications include extensions of previous permissions or some
reviews of past decisions.
It was discovered, as in the case of CDA zoning (Lai et al., 2015,
2016), multiple s.16 applications were made for many projects. Each
application may be linked to a preceding and a subsequent application,
as the case may be. The related applications normally form a project
“application web”, and we have depicted each project as a chain of
linked applications.
All in all, a total of 625 sites were found from the data 1975 to 2020.
Of the 625 projects, 148 have been approved. With their addresses
disclosed in the application forms, the names of the existing buildings
were identified.
To the extent possible, the name of the developer and owner for each
site were traced through real estate websites and the Land Registry. One
difficulty here was to link the names to the ultimate owners. When big
developers carry out a construction project in Hong Kong, they normally
establish a new subsidiary company (Yip et al., 2020).
After eliminating applications for changes in use to more than one
type of use and the “Others” category, applications around the policy
change date (to avoid potential sampling bias) a total of 1440 usable
observations were left for the purpose of testing the three hypotheses.
The applications (land use types) are categorized as shown in Table 2.
5.3. Logit model
To test the three hypotheses, we estimate logit regression model that
have been applied to planning applications and development control
K.W. Chau et al. Cities 137 (2023) 104291

Table 2 some applications may have dragged on for a long time, so the TPB
Categorization of GIC uses in terms of value. members may have changed. Since we do not have information on the
Use category in Use category in Type of land use applied for members judging each case, we had to assume that there was no change
Hypothesis 1 Hypothesis 2 of membership or that change of membership had no effect on the
PRIVATE HIGH-VALUE Columbarium or funeral related uses decisions.
Hotel or hostel or holiday camp
Commercial use 6. Empirical results and interpretation
Residential use
Office use
LOW-VALUE Storage or logistic storage or container
Table 3 shows the result of testing Hypothesis 1. All observations are
parking or recycling areas used in estimating the logit model. The size effect is captured by the
Light and private vehicle parking control variable GFA which is the gross floor area in m2. Smaller de­
Petroleum refilling stations velopments were found to be more easily approved. However, the
PUBLIC PUBLIC Regular school up to secondary level or
relationship was not linear in GFA. The variable is significant at the 1 %
special, technical and vocational schools
Church, temple or other religious after natural logarithmic transformation indicating the marginal effect is
functions smaller for larger GFA which suggest diminishing returns.
Other public utilities like transmission Another variable control variable a location dummy variable which
lines, and reservoirs equals one if the site is location on the Hong Kong Island (HKI). Since
Social welfare facilities such as hospitals
and elderly centres
Hong Kong Island is the core urban area with limited supply of devel­
Public sports, cultural and other opable urban land. Land on Hong Kong Island is also less substitutable
recreational facilities by sub-urban areas since it is isolated from Kowloon and the New Ter­
ritories by the sea (Victoria Harbour). The results show that HKI is not
significant, however, its interaction with GFA is significant at the 5 %
previously (Tang et al., 2005, 2007; Tang & Choy, 2000; Tang & Tang,
level. Since GFA cannot be equal to zero, the result suggests that GIC
1999; Yu & Hui, 2017). This model is similar to probit regression model
sites on Hong Kong Island are less likely to be approved for development
in similar studies (see for instance Butsic et al., 2011; Lai & Ho, 2001;
compared with those not on Hong Kong Island and the different in
Chau & Lai, 2004). Logit and other discrete choice models have been
probability of being rejected for development increases with GFA.
used to study agency conflicts (e.g.) and different aspects of the
The first variable of interest is the dummy variable PRIVATE which is
principal-agent conflicts in many areas (Scott & Vick, 1999; Connolly,
equal to 1 if the land use application is for-profit private uses (See
2017; Mustafa et al., 2017; Daneshvary & Clauretie, 2013; Longarela-
Table 2). Its coefficient is negative and significant at the 1 % level, which
Ares et al., 2020; Horiuchi & Shimizu, 2001; Nguyen, 2011; Hamman
is consistent with Hypothesis 1.
et al., 2010; Bhat, 1997; McGuire & Ohsfeldt, 1989). We have chosen to
The marginal effects are calculated at the sample means of the in­
estimate the logit instead of probit model since logit model since the
dependent variables as well as mean value of all sample observations
goodness of fit measure (the pseudo r squared) is more extensively
using the methods described in Anderson and Newell (2003) and Car­
studied due to the simplicity of the logistic functional form. We have also
levaro and Sénégas (2006). The marginal effect of a dummy variable
estimated the probit model and the results are very similar. In order not
represents the change in probability of success when the dummy vari­
to make the paper unnecessarily long, the probit results are not pre­
able switches from zero to one. Therefore, the probability of success in
sented but are available upon request.
the application for change of GIC land use to for-profit private land use is
We have estimated the following logit model to test the three hy­
24.12 % lower compared with public and community use.
potheses using the GIC planning application data we have collected:
Table 4 Shows the result of testing Hypothesis 2. Since we are testing
( )
Pr(PA = 1|X) = F XT β (1) the difference between high and low value private use, we only include
applications for private use (i.e. PRIVATE = 1) in estimating the Logit
where PA is a binary dummy that equals one if the planning application model. All variables are of the expected sign. The variable HIGH-VALUE
is successful and zero otherwise; Pr is the probability that the binary is equal to 1 if the application is for high value use (Table 2) and zero
dummy variable Y equals 1 conditioned on a vector X of variables that otherwise. Its coefficient is negative and significant at the 1 % level
affect the TPB’s decision, F is the cumulative distribution function (CDF) meaning that high value private use is less likely to be approved as
of the logistic distribution. The vector of parameters β were estimated by predicted by Hypothesis 2. On average, for-profit high value private land
maximum likelihood method. use is 21.067 % less likely to be approved compared with the low-value
The vector of variables X includes the category of applications, policy
dummies which equals one after the policy date (i.e. 9 June 2005) and
Table 3
zero otherwise and control variables.
Result of testing Hypothesis 1.
Variable Coefficient ME1
ME2
5.4. Limitations
Constant 4.4550 (0.3880) *** 0.5847
0.6258
Despite our efforts to collect as much data as possible and ensure its
ln(GFA) − 0.1575 *** − 0.0207
accuracy, there are still a few limitations in the data used to test the (0.0347) − 0.0221
hypotheses. Firstly, a large number of applications have incomplete PRIVATE − 1.8379 *** − 0.2412
information, so we had to exclude these observations from our analysis. (0.2813) − 0.2582
This may lead to sampling bias if the incomplete records are not random. HKI − 0.2534 − 0.0333
(0.1795) − 0.0356
Secondly, the size of the application project was measured using the HKI × GFA − 1.28 × 10− 5 ** − 1.68 × 10− 6
gross floor area of the completed project. However, some projects had no (5.64 × 10− 6) − 1.79 × 10− 6
structure (e.g. open carparks) and in these cases, we treated the car­ McFadden R squared 0.0883 No. of observations: 1440
parking areas as GFA. Thirdly, we assumed that each application was an Horowitz R squared 0.0855
independent event, but it is possible that the TPB members could be ME1: marginal effect evaluated at the mean. ME2: mean marginal effect.
influenced by the decisions of a similar application, particularly those Standard error in the parentheses. ***, ** and * indicate significant at the 1 %, 5
previously approved or rejected by the same TPB members. Fourthly, % and 10 % respectively.

5
K.W. Chau et al. Cities 137 (2023) 104291

Table 4 Table 6
Result of testing Hypothesis 2. Result of testing Hypotheses 2 and 3 together.
Variable Coefficient ME1 Variable Coefficient ME1
ME2 ME2

Constant 3.3007 *** 0.5418 Constant 4.5579 *** 0.4885

(0.3491) 0.5342 (0.4702) 0.6074
ln(GFA) − 0.1340 *** − 0.0220 ln(GFA) − 0.1437 *** − 0.0154
(0.0365) − 0.0217 (0.0372) − 0.0192
HIGH-VALUE − 1.2827 *** − 0.2106 HIGH-VALUE − 2.4845 *** − 0.2663
(0.2042) − 0.2076 (0.3737) − 0.3311
HKI − 0.2012 − 0.0330 LOW-VALUE − 1.9741 *** − 0.2116
(0.2059) − 0.0326 (0.4186) − 0.2631
HKI × GFA − 2.05 × 10− 5 *** − 3.36 × 10− 6 D2005 − 1.1863 ** − 0.1271
(7.60 × 10− 6) − 3.36 × 10− 6 (0.5501) − 0.1581
McFadden R squared 0.0805 No. of observations: 1113 HIGH-VALUE × D2005 1.2402 ** 0.1329
Horowitz R squared 0.0772 (0.5863) 0.1653
LOW-VALUE × D2005 3.9062 *** − 0.4186
ME1: marginal effect evaluated at the mean. ME2: mean marginal effect. (0.8252) − 0.5206
Standard error in the parentheses. ***, ** and * indicate significant at the 1 %, 5 HKI 0.1070 − 0.0115
% and 10 % respectively. (0.1889) − 0.0143
HKI × GFA − 1.23 × 10− 5 ** − 1.32 × 10− 6
(5.76 × 10− 6) − 1.65 × 10− 6
counterpart.
McFadden R squared 0.1510 No. of observations: 1440
Table 5 shows the result of testing Hypothesis 3. D2005 is the policy Horowitz R squared 0.1453
dummy which is equal to 1 if the application was made after 2005 and
ME1: marginal effect evaluated at the mean. ME2: mean marginal effect.
zero otherwise. The variable D2005 captures the effect of the increase in
Standard error in the parentheses. ***, ** and * indicate significant at the 1 %, 5
public participation on TPB decisions. While the coefficient of D005 is
% and 10 % respectively.
positive and significant at the 5 % level, the interaction term PRIVATE
× D2005 is negative and significant at the 1 % level. The magnitude
magnitude is significantly larger than that of D2005 (p < 1 %), which
coefficient of the latter is significantly larger than that of the former,
suggests that the success rate of low-value for-profit private land use
which suggests that an application for the change of GIC land use to for-
applications has increased after increased public participation. Although
profit private use was more likely to be approved after allowing for
the coefficient of HIGH-VALUE × D2005 is also positive and significant,
wider public participation in 2005. The result is consistent with the
its magnitude is not significantly larger than that of D2005. This means
prediction of Hypothesis 3.
that more public participation cannot lower the Approval Risk of
The estimated marginal effects show that before the policy change,
approving the change of GIC land use to high-value for-profit private
the probability of success for an application for change of GIC land use to
land uses. The empirical results are consistent with the implication of
for-profit private land use was 30.63 % less than those for public and
the joint effect of Hypotheses 2 and 3.
community use. However, after the policy change, the probability of
Before the policy change, high-value and low-value for-profit private
success for change to private use increased by 25.7 %. The policy change
land use applications were respectively 26.63 % and 21.16 % less likely
has substantially reduced the TPB member’s Approval Risk.
to be approved compared with those of public and community uses
Hypotheses 2 and 3 together imply that the impact of increase in
applications. The difference was only 5.47 %. and insignificant. After the
public participation on low-value for-profit land use application is
policy change, the average probability of success for low-value for-profit
stronger than that of the impact on the high-value counterpart, since the
private land use applications was 41.86 %–13.29 % = 28.57 % higher (p
Approval Risk is higher for the latter which cannot be easily reduced by
< %) than that of high-value use applications. The result shows that the
wider public consultation. We test this implication by interacting LOW-
impact of public consultation is significantly higher for low-value use.
VALUE and HIGH-VALUE with. The result is shown in Table 6.
Public consultation is not sufficient to lower the Approval Risk of high-
The coefficient of LOW-VALUE × D2005 is positive, and its
value land use application.
The McFadden R2 of the full model is 0.1510 which appears to be low
Table 5 compared to the R2 of the OLS regression. However, McFadden R2 is a
Result of testing Hypothesis 3. form of log-likelihood-based pseudo R2 which does not represent the
Variable Coefficient ME1
proportion of variation in the dependent variable explained by the in­
ME2 dependent variables but rather the improvement in model likelihood
over a null model (Hemmert et al., 2018). The value of McFadden R2 is a
Constant 4.4891 *** 0.5670
(0.4621) 0.6194 lot lower than the OLS regression R2 and a value between 0.2 and 0.4
ln(GFA) − 0.1228 *** − 0.0155 indicates excellent model fit (McFadden, 1974). However, Hemmert
(0.0357) − 0.0169 et al. show that pseudo R2 is affected by symmetry of the dependent
PRIVATE − 2.4253 *** − 0.3063 variable (equal number of zeroes and ones indicates perfect symmetry),
(0.3726) − 0.3364
D2005 − 1.2322 ** − 0.1556
number of independent variables, and sample size. Higher degree of
(0.2059) − 0.1700 asymmetry, smaller number of independent variable, and larger sample
D2005 × PRIVATE 2.0345 *** 0.2570 size tend to decrease the McFadden R2. Therefore the benchmark range
(0.5796) 0.2807 should be adjusted for these factors. Based on a meta-study of 274
HKI − 0.0840 − 0.0106
published research papers with logistic models and simulation results,
(0.1862) − 0.0116
HKI × GFA − 1.30 × 10− 5 ** − 1.65 × 10− 6 Hemmert et al. show that amongst all the likelihood-based pseudo R2,
(5.74 × 10− 6) − 1.80 × 10− 6 Horowitz’s (1982) modified McFadden R2 is least affected by the above
McFadden R squared 0.1064 No. of observations: 1440 factors. Hemmert et al. also derive the range of different pseudo R2 that
Horowitz R squared 0.1021 are equivalent McFadden’s range of 0.2–0.4 after adjusted for the above
ME1: marginal effect evaluated at the mean. ME2: mean marginal effect. factors. Our final logit model has 1440 observations (>200) and degree
Standard error in the parentheses. ***, ** and * indicate significant at the 1 %, 5 of asymmetry = 4.313 (>1.6), and the Horowitz’s modified McFadden
% and 10 % respectively.

6
K.W. Chau et al.
R2 is 0.1453 (McFadden R2 is 0.1510) which is within Hemmert’s
benchmark range of 0.09–0.17 (McFadden R2 range: 0.11–0.20). This
suggests that our empirical data fit the model rather well.
Although our data fit the model well, one should bear in mind that a
low pseudo-R2 does not necessarily invalidate the empirical results. This
is especially true for dependent variables that involve a lot of human
errors or judgements, since these variables tend to be noisy and a sig­
nificant portion of their variations cannot be explained by the observed
variables. In Hemmert et al.’s sample of published papers in top business
and economics journals, close to 40 % of the papers involving logistic
regression have pseudo R2 lower than their derived benchmark range of
“good fit”.
7. Discussion
This study applied a principal-agent model to predict the TPB’s de­
cisions on planning applications for change of land zoned GIC use to
other uses. Central to model is the TPB’s (agent’s) behavior to minimize
Approval Risk under the constraints of the involvement of the principal
(citizens).
The change of policy in 2005 provides an excellent opportunity for
testing the impact of increasing the principal’s involvement in lowering
the Approval Risk. We used planning application data concerning sites
zoned solely as GIC only so as to minimize the effect of other zonal
factors that may affect the TPB’s decisions.
All empirical results are consistent with the predictions of the three
hypotheses derived from the principal-agent analysis. First, it is gener­
ally perceived that public and community use applications do not
involve private economic gain and thus lower perceived Approval Risk.
Second, the higher the perceived economic benefits that could be ach­
ieved by private applicants, the less likelihood of obtaining approval by
TPB. Third, an increase in the opportunity for public participation in the
planning approval process has decreased the Approval Risk of the TPB
members. However, the reduction in Approval Risk does not affect the
approval of applications for high-value for-profit private land uses,
which usually result in potentially higher economic benefits for the
applicant.
The name of the GIC zone apparently has a systematic psychological
effect on the pattern of approvals against profit making applicants
especially those land uses that can realise higher land values. Thus, it
was easier, as the results above show, for the TPB to feel more
comfortable in accommodating public and community uses rather than
the for-profit private uses, as the perceived Approval Risk for the former
is lower. This interpretation of the findings is in line with the popular
sentiment against developer “profiteering”, which has the background
that the original uses were leasehold land grants that were often, but not
always, charged a nominal premium for charitable or public utility
purposes.
In any event, any use higher in value than the original use, unless
otherwise permitted by the Crown (Government) Lease, attracted a
premium to be paid by the applicant and hence profiteering was a
perception rather than a real issue. In any case, compared with other
large-scale development areas such as Comprehensive Development
Area (CDA) zone development, the time required for GIC zone devel­
opment is still shorter, and hence GIC zones are attractive to developers
as vacuoles for quicker development and return.
Since residential use is one of the major for-profit high-value private
uses and that many TPB members own one or more private residential
units, it is possible that some TPB members reject applications for
change of GIC zone to private residential zone so as to limit supply and
sustain residential prices. To test this possibility, we replaced HIGH-
VALUE with a dummy variable (RESIDENTIAL) which equals 1 if the
application is for change to private residential land use and zero
otherwise and re-estimates the models in Tables 4 and 6. The results are
similar, except that the coefficients of RESIDENTIAL are less significant
than those of HIGH-VALUE. Therefore, it is unlikely that TPB members
7
Cities 137 (2023) 104291
reject private residential applications due to self-interest in sustaining
residential prices.
8. Conclusion
This study found by a logit analysis of 1440 sets of disaggregate
planning application and decision data, against intuition, that a policy
change allowing greater public participation in objecting to planning
proposals did not lower but increased the success rate of planning ap­
plications made by the private organizations, though the impact was
mainly on applications for low-value land uses. Consistent with the idea
of a lower perceived Approval Risk, non-profit making organizations
generally stood a higher chance of winning planning approvals and or­
dinary developers found it harder to get high-value land uses approved.
It is hoped that this study will stimulate further research on the effect of
public opinion on the planning authority decision making patterns.
Some possible policy implications can be identified from this study.
The shortage of developable land for housing and non-residential use in
Hong Kong has been a long term social and political problem in Hong
Kong, which has led to a housing affordability issue and the gradual loss
of international competitiveness for the territory’s business sector.
Despite such shortages, the increase in the supply of developable land
has been slow. An increase in developable land should benefit the so­
ciety as a whole, although this may, at the same time, create more
business opportunities for developers. However, the Approval Risk
minimizing behavior of the TPB has resulted in planning decisions that
may not be optimal for the citizens of Hong Kong, taking them as a
whole. Although greater involvement of the general public can lower the
Approval Risk, such involvement is not sufficient to lower the Approval
Risk for high-value land uses, which are the most needed for Hong Kong.
Since the involvement of the principal occurs after the appointment of
the TPB members (ex post involvement), the impact on the alignment of
the interest of the agent and principal is limited. One possible way to
further align the interest of the agent and principal is to involve the
agent in the selection of the principal by a more democratic process (ex
ante involvement).
Moreover, regarding the principle-agent relationship, it is essential
to ensure that the TPB members are agents acting collectively on behalf
of their principal (all citizens). Systematic and effective communication
should be developed on a long-term basis, for example, better use of
social media and platforms should be adopted rather than primarily
using formal channels in the statutory planning system. Such means can
enhance the decisions made by TPB increasing the probability that they
are in line with the citizens’ will.
Public participation can also be further enhanced by empowerment
of the citizens’ capabilities and knowledge in the urban planning system,
and by a more collaborative planning approach where interactions be­
tween different stakeholders in development projects can be adopted in
both public and private sectors. The recent government directive to
constrain public participation may be unwise.
CRediT authorship contribution statement
Chau, K. W: Conceptualization, Methodology, Software, Investiga­
tion, Formal analysis, Writing - Original Draft, Writing - Review &
Editing. Choy, Lennon H. T.: Conceptualization, Methodology, Writing -
Original draft preparation. Chua, Mark H.: Data Curation. Lai, Lawrence
W.C.: Conceptualization, Methodology, Data Curation, Writing - Orig­
inal Draft, Writing - Review & Editing, Supervision. Yung, Esther H.K.:
Conceptualization.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
K.W. Chau et al. Cities 137 (2023) 104291

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Lai, L. W. C., Ho, D. C., Chau, K. W., & Chua, M. H. (2016). Repeated planning
applications by developers under statutory zoning: A Hong Kong case study of delays
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