The Holdout Problem and Urban Sprawl:
Experimental Evidence
John Cadigan
Pamela Schmitt
Robert Shupp
Kurtis Swope*
June 25, 2009
Abstract
Conventional wisdom, as well
as economic theory, suggests that it is more costly to reassemble fragmented
land due to transactions costs and strategic bargaining costs. Furthermore,
both costs are expected to increase with the number of sellers. This leads to
property entropy (Parisi 2002), and encourages
developers to seek consolidated land. Inefficient allocation of land resources
may result including urban sprawl (Miceli and Sirmans 2007) and deteriorating inner cities. Given the
difficulty in the field of observing values attached by buyers and sellers to
landholdings, little empirical evidence exists to support the conventional
wisdom and theoretical work. We use experimental methods to examine transactions
costs and strategic bargaining costs in a land-assembly market game with one
buyer, one to four sellers, and complementary exchanges. The buyer’s final earnings are inversely
related to the number of sellers, ceteris paribus, indicating an incentive to
purchase consolidated land. Delay costs reduce holdout, but result in lower
payoffs for both buyers and sellers. Competition between sellers reduces
holdout and the buyer’s total purchase price.
Keywords: Holdout problem; land assembly; urban sprawl
JEL classification: C92 ;
K11 ; J5
Financial support from the National Science Foundation
(grant #0720696), the Naval Academy Research Council, and
*Corresponding author: Department of Economics, U.S. Naval Academy, 589 McNair Rd, Annapolis, MD 21402, Email:swope@usna.edu, Phone: 410-293-6892, Fax: 410-293-6899