Fragmented Ownership and Second Homes in Tourism Resorts

In spite of the generally accepted view that second homes induce a higher seasonality and a lower occupancy rate than hotels, they persistently prevail in many tourism destinations. This paper introduces a mechanism to illustrate and analyze the decision problem of constructing second homes or hotels. We introduce a two period game with two players representing a developer of buildings in a tourism destination D and a tourist T. D owns a piece of land and faces two alternatives: to construct a hotel or to build a second home. T has to choose between buying a second home or renting a hotel room. Another ingredient of the model is an externality mechanism representing the value placed by tourists on the probability of finding an available place at the destination. The paper shows the persistence of sub-optimal equilibria in the game, in which the land is allocated to a socially inefficient use (second homes rather than hotels). We show that a necessary condition for such inefficiency to emerge is that the related externality cannot be internalized. This occurs under a regime of dispersed ownership.