When an economic exchange requires agreement by multiple independent parties, the potential exists for an individual to strategically delay agreement in an attempt to capture a greater share of the net benefits created by the exchange. This holdout problem, as it has been called, is a common concern of land development and urban renewal, which often require the assembly of multiple parcels of land. Production of new products may require the use of multiple patented intermediate goods. Debt restructuring may require acceptance by multiple bondholders. Holdout can lead to costly delays or failed exchanges, and, therefore, has been cited as justification for eminent domain, the legal power of the state to expropriate private property without the owner's consent. However, the consequences and extent of holdout behavior in the field are difficult to measure because the true costs and benefits associated with exchanges are often not observable.
This project, therefore, uses laboratory experimental methods to examine holdout behavior in bargaining games that involve multiple parties and rounds. Because the payoffs of all subjects in the experiment fall when an individual holds out, holding out incurs a payoff-reducing externality on other parties. The project will address the following important questions: Is holdout a payoff-improving strategy in the presence of delay costs? Which institutions lead to the greatest holdout behavior and efficiency losses? Does bargaining behavior in the land assembly game conform to theoretical predictions? How do bargainers respond to larger group sizes, increased competition, heterogeneity, incomplete information, and delay costs? Overall, this project will provide an important link between the theoretical analysis of holdout developed in the land assembly literature and the experimental analysis of behavior in bargaining games, will develop new education tools, and will provide valuable insight to policymakers concerning the use of eminent domain.
