Thursday, May 22, 2014

Winn & McCarter on Eminent Domain and the Seller Holdout Problem

Abel Winn (Chapman - Econ) and Matthew McCarter (Texas - Econ) have posted Who's Holding Out? An Experimental Study of the Benefits and Burdens of Eminent Domain on SSRN.  Here's the abstract:

Eminent domain is widely considered a necessary tool to avoid seller holdout and ensure efficient land assembly. We conduct a series of laboratory experiments that challenge this conventional wisdom. We find that when there is no competition and no eminent domain, land assembly suffers from costly delay and failed assembly, resulting in participants losing 18.1% of the available surplus. Much of this delay is due to low offers from the buyers rather than strategic holdout among sellers. Introducing weak competition in the form of a less valuable substitute parcel of land reduces delay by 35.7% and virtually eliminates assembly failure, so that only 11.5% of the surplus is lost. When buyers can exercise eminent domain the participants lose 18.6% of the surplus. This loss comes from spending money to influence the fair market price and forcing sellers to sell even when they value the property more than the buyer.

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