Proprietary cities and institutional change

Alex Tabarrok has an interesting post on proprietary cities in India.  He writes,

In Lessons from Gurgaon, India’s private city (working paper) found in a new book Cities and Private Planning  Shruti Rajagopolan and I explore this question. Gurgaon, which I have written about before, shows both the successes and failures of private development. On the surface, Gurgaon is a gleaming, modern city built nearly overnight on wasteland. Gurgaon was built, however, without benefit of planning and its failures–most notably poor and inefficient provision of  water, sewage, and electricity–are a warning. The failures all stem from high transaction costs, Gurgaon’s private developers have simply not managed to Coasean bargain and internalize externalities. It’s clear from Gurgaon that cities need advance planning–a reservation of rights of way for water, sewage and electricity at the very minimum–but does the planning have to be provided by government which is often incapable of such foresight?
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The lessons of Jamshedpur, India, suggest another approach. Jamshedpur is a private township, planned from the beginning by visionary businessman Jamshetji Nusserwanji Tata, who, after travelling to the United States to see Pittsburgh, returned to India to found Tata Iron and Steel. Jamshedpur has been run by a single, integrated entity for over 100 years and as it is integrated it has internalized externalities. As a result, Jamshedpur, India’s other private city, has some of the best urban infrastructure in all of India.

While supplying good infrastructure is important, it pales in comparison to the importance of institutions.  If these developers are going to spend hundreds of millions or billions of dollars why not lobby the state to opt out of onerous laws.  Florida created a special district for Disney to create an amusement park.  Surely the benefits to India would be far greater.
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SEZ growth

 
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The Growth of SEZs suggest governments are increasingly willing to grant local legal autonomy.  Proprietary cities could start by opting out of licensing laws and other trade restricting legal burdens.  Such a process would have to be carefully managed, but eventually (or sooner) allowing a proprietary city to hire a common law judge to adjudicate disputes seems to have little downside.  Why not give it a try?
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Edit: Thanks Tom Bell for the graph.  Be sure to watch out for his new book Your Next Government?

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