Land Assembly & the holdout problem
University of Connecticut Dept of Economics Working Paper Series
Authors: Thomas J Miceli
and Kathleen Segerson
It has long been known by economists (and probably longer by developers) that the assembly of several contiguous but separately-owned parcels of land for large scale development projects can be impeded by the holdout problem. The exact nature of the problem, and why it potentially prevents efficient assembly, however, has defied a clear description.
Despite much discussion and handwringing by policymakers, the holdout problem is still not understood clearly. It is vaguely atributed to monopoly power or high transaction costs. This paper has developed a theory of the holdout problem that does not rely on ad hoc assumptions, but instead shows that it emerges from ordinary Nash bargaining between a buyer and a sequence of sellers, each of whose land is essential for the completion of a development project.
The model predicts that prices will rise as the assembly progresses, with the final seller receiving the highest price.
The model further implies that the sum of the prices paid to all sellers will exceed the aggregate reservation prices of sellers (the opportunity cost of the project) in the special case where individual parcels are worth less to the buyer than to sellers.
This situation, the paper suggests, represents the paradigmatic holdout problem, and explains why some efficient projects will be foregone in the absence of government intervention to force sales.
(Adapted from the conclusion to study)