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IESES / Archives / Methods to Overcome the Hold-Out Problem in Land Acquisition: An Experimental Economics Study

Methods to Overcome the Hold-Out Problem in Land Acquisition: An Experimental Economics Study

By: Mike Willinger, IESES Public Policy Program Planner 

In order to construct long-distance transmission lines to connect new alternate energy sources to population centers, issues of land acquisition are central for policy makers. It is often necessary to put several land parcels together to build renewable energy power plants as well as connect the energy to homes and businesses. This practice is called land assemblage. One common problem in putting together land parcels for an assemblage is the refusal of a land owner to sell at the market price, holding out for a better price. If ways to mitigate the hold out problem are not employed, hold-out sellers can increase costs for the buyer.

Land parcels, in blue, becoming a land  assemblage.

 

Economics Professor Mark Isaac and his former graduate student, now Assistant Professor at Fordam University, Sean Collins were concerned about the hold out problem and its potential to limit development of renewable energy sources in the U.S. Using The Florida State University Experimental Social Sciences Lab, they developed an experiment that recreated different land assemblage scenarios. The lab consists of computer stations programed with land assemblage scenarios. The researchers can interact with the volunteer subjects. The volunteers were recruited for the experiment and they were assigned to different roles as buyers and sellers with different experimental conditions.

Drs. Isaac and Collins conducted a variety of experiments that tested different aspects of buying and selling land for an assemblage. Ultimately, they tested whether methods typically used in the private sector to limit hold-out are effective. The land sellers reliably acted as hold-outs in the first scenarios, until contingent contracts were introduced. In later scenarios, a buyer employs contingent contracts to negotiate with all the sellers and does not purchase the land until all the parcels are under contract. The sale is dependent on having an agreement among all the sellers and only then does the sale take place. The experiments verify that contingent contracts nearly eliminated the hold-out problem. These results indicate that when a land assemblage is being created for a renewable energy power plant, contingent contracting methods could significantly reduce the hold-out problem in land sales.

Dr. Mark Isaac is an IESES research partner and this research was funded by IESES.
A copy of the original paper can be accessed here.

Dr. Mark Isaac, John & Hallie Quinn Eminent Scholar of Economics
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