American Law and Economics Review Advance Access originally published online on June 1, 2007
American Law and Economics Review 2007 9(1):160-174; doi:10.1093/aler/ahm005
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A Bargaining Model of Holdouts and Takings
The Department of Economics, University of Connecticut
Send correspondence to: Thomas J. Miceli, Department of Economics, Unit 1063, University of Connecticut, Storrs, CT 06269, USA. Phone: (860) 486-5810, Fax: (860) 486-4463; E-mail: Thomas.Miceli{at}uconn.edu.
JEL codes: C78, K11, R14, R52
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Abstract |
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The holdout problem is commonly cited as the justification for eminent domain, but the nature of the problem is not well understood. This article models the holdout problem in a bargaining framework, where a developer seeks to acquire several parcels of land for a large-scale development. We show that in the absence of eminent domain, holdouts are a significant threat, resulting in costly delay. However, if the developer has the power to use eminent domain to acquire the land from holdouts, all sellers will bargain, thus avoiding delay. An offsetting cost is that owners may negotiate prices below their true value, possibly resulting in excessive transfer of land to the developer.
We acknowledge the insightful comments of Steven Shavell and participants at the Takings Conference at the University of California, Santa Barbara, May 12–13, 2006.