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Arthur Zillante, * Associate Professor of Economics, Department of Economics, University of North Carolina at Charlotte, 9201 University City Blvd., Charlotte, NC 28223, USA; E-mail [email protected] ; corresponding author.
Peter M Schwarz, [dagger] Professor of Economics, Department of Economics, University of North Carolina at Charlotte, 9201 University City Blvd., Charlotte, NC 28223, USA; E-mail [email protected]
Dustin C Read, [double dagger] Director of the Center for Real Estate, Department of Finance, University of North Carolina at Charlotte, 320 E. 9th Street, Charlotte, NC 28202, USA; E-mail [email protected]
[Acknowledgment]
The authors would like to acknowledge a BB&T Faculty Development Grant awarded by the Belk College of Business for the completion of this project. The authors would also like to thank Bart Wilson and Jennifer Cunningham for their assistance conducting the economic experiments at Chapman University's Economic Science Institute laboratory. We thank Kurtis Swope and participants at the 2010 Southern Economic Association Annual Meetings and the University of Oklahoma Economics Seminar Series for helpful comments. Finally, we thank Pulkit Gupta for his research assistance. All errors are our own.
1. Introduction
Assembling land can be one of the most challenging aspects of real-estate development. Fragmented ownership interests must be identified, multiple contracts negotiated, and due diligence activities coordinated to ensure that all of the transactions are executed in a timely manner. Throughout the process, the developer must also address the risk that one or more of the parcels needed to complete the project cannot be purchased at an agreeable price. Some landowners may simply be unwilling to sell, while others may act strategically in the hopes of obtaining a larger share of the developer's profit. The latter of these issues is referred to as the "holdout problem" and has received a considerable amount of attention in the economics literature as an impediment to efficient land assembly. Strategic holdouts can inadvertently prevent Pareto optimal development from occurring when the demands of select individuals push the aggregate cost of land beyond the point where the developer can achieve an acceptable rate of return.
In some instances, strategic holdouts have stymied real-estate development activity, while in others they have encouraged government entities to exercise their power of eminent domain to ensure that desired economic development projects move forward. The use...