The Elevator Saga

This case describes a common situation in old buildings, namely the decision as to whether intall an elevator. In this armchair case, we have an apartment building in Budapest with 24 homeowners with a possible interest adding an elevator to the walk-up building. The case begins by discussing serveral ways to fairly distribute the cost if the elevator is approved. One way is an equal split. The second way is to have the homeowners living on higher levels pay more. A formula that effectively implements the Shapley value is proposed. Next, the case describes the pivot mechanism as a way to bypass the free riding problem that would arise if homeowners were simply asked about their willingness to pay. The question for discussion is whether the homeowners would agree to use the pivot mechanism. In particular, how to explain to the homeowners the penalties that would result from implementing the mechanism and how those penalties are applied to those homeowners who are pivotal. The challenge for students is how to market the pivotal mechanism. Excerpt UVA-QA-0866 Apr. 27, 2017 The Elevator Saga The Budapest building was a former six-floor factory that had been converted into a common-interest development of retail shops and 24 apartments. At a meeting to discuss building an elevator, the head of the homeowner's association (HOA), Nick Varga, expected a lively debate over the project. The existing maintenance fund fell short of the funds needed to cover construction and it had been suggested that a one-time fee would be levied on each apartment owner with financing available for those residents who wanted or needed it. Following three years of discussion among the homeowners and meetings with building experts and financial advisors, a bidding process was about to ensue. Varga could feel some of the homeowners bristle as they sat and said nothing. Then he opened the meeting to discussion. The Building In several former socialist republics, government-built, -owned, and -maintained buildings had been rented out. The shift to a market economy meant that these buildings were either sold off or ownership was transferred to the current residents. The price paid for these properties was based on size, age, and the type of construction (in contrast to its current value, condition, or location). Most apartment owners shared common property such as the rooftop, outdoor areas, and gardens. During the shift from government control to private ownership, there had been concern that new property owners would refuse to pay their share for upkeep of common areas. To prevent this, legal entities called HOAs were formed throughout Hungary to support common areas and ensure management responsibilities for the building and common areas were assumed. In the particular building where Varga lived, 24 privately owned two-bedroom apartments varied in size from 86 to 168 square meters (900 to 1,800 square feet) in a six-story walk-up building. The street-level spaces were owned by individual retailers and included a restaurant, a small fruit/vegetable market, and a local bank. By law the retailers were excluded from being party to the HOA. The common areas shared by all homeowners included a rooftop deck equipped with seating areas, a dog park outside the rear of the building, bike stations, and freestanding storage areas. The retailers did not have access to any of these private common areas. The HOA . . .