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The Holdout Problem and Urban Sprawl: Experimental Evidence

Listed author(s):
  • Kurtis Swope

    ()

    (United States Naval Academy)

  • Pamela Schmitt

    ()

    (United States Naval Academy)

  • John Cadigan

    ()

    (Gettysburg College)

  • Robert Shupp

    ()

    (Michigan State University)

Conventional wisdom as well as economic theory suggests it is more costly to reassemble fragmented land due to transactions costs and strategic bargaining costs. Both costs are expected to increase with the number of sellers. Inefficient allocation of land resources may result including property entropy (Parisi 2002), urban sprawl (Miceli and Sirmans 2007) and deteriorating inner cities. Given the difficulty of observing actual values attached by buyers and sellers to land, 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 vary inversely with 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.

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File URL: http://www.usna.edu/EconDept/RePEc/usn/wp/usnawp24.pdf
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Paper provided by United States Naval Academy Department of Economics in its series Departmental Working Papers with number 24.

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Length: 23 pages
Date of creation: Sep 2009
Handle: RePEc:usn:usnawp:24
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