The Problem with the Holdout Problem

Kelo et al. v. City of New London, Connecticut, 545 U.S. 469 (2005).

Other bargaining models suggest that the inefficiencies of holdout can be solved by careful market design. Kitchens and Rooments (2011) model seller behavior in a sequential land assembly game with contingent contracts and find that there is a relationship between sellers’ bargaining power and the prices they receive with versus without the use of eminent domain. Kominers and Weyl (2012) propose mechanisms by which all available information can be used to estimate without bias sellers’ willingness to accept, and sellers can coordinate behavior through Pigovian taxes on holdouts, thus correcting for holdout inefficiencies.

“The country that became the United States was unique in world history in that it was founded by individuals in quest of private property… [T]he conviction that the protection of property was the main function of government, and its corollary that a government that did not fulfill this obligation forfeited its mandate, acquired the status of a self-evident truth in the minds of the American colonists” Pipes (1999:240).

Kelo et al. v. City of New London, Connecticut, 545 U.S. 469 (2005) at 13.

Kelo et al. v. City of New London, Connecticut, 545 U.S. 469 (2005) at 12–16.

Somin (2011) provides a thorough analysis and review of court rulings in the American States.

Somin (2008), Morriss (2008), or López et al. (2009).

This entire section draws directly from Miceli (2011).

Somin (2008) and Benson (2005) discuss the array of private contract mechanisms that developers have historically used to overcome strategic holdouts.

We follow Miceli (2011) in assuming that the regulator can distinguish between homeowners who holdout for strategic versus sincere reasons. A “strategic holdout” is a property seller who is willing to accept the developer’s price yet holds out in order to redistribute more of the bargaining surplus from the developer to the homeowner. By contrast, a “sincere holdout” is a property owner who has sufficiently high subjective value such that his willingness to accept exceeds the developer’s willingness to pay.

See Godwin et al. (2006) for a review.

For example, the Charleston (W.Va.) Urban Renewal Authority (CURA) has a history of frequent and large-scale use of the takings power for economic development. From the 1960s through the middle of 2006, CURA condemned 523 properties for 47 development projects, 28 of which were private development projects (Anderson, 2006). Although CURA’s condemnation rate has slowed in the past two decades, West Virginia is still a relatively aggressive user compared to other states. Since 1998, West Virginia ranks 19th in per capita properties condemned for private use (López et al., 2009). CURA’s property acquisitions have become so routine, the authority now performs many of the quotidian functions of a real estate company. “We do buy land that is blighted, if you will, and we also have property available for redevelopment. We usually put signs on our property. We get direct calls, referrals from the [Charleston Area] Alliance as well as the city, and we all work together” (Ali, 2008).

Much of James M. Buchanan’s work sought to dismantle the implicit “benevolent despot” assumption that ran through most standard models in neoclassical public finance. See Buchanan (1962) as an important example. Similarly, as Ronald Coase (1960) and Harold Demsetz (1969) noted, Nirvana is not an option.

Fleck and Hanssen (2010) model the processes through which welfare-maximizing voters can increase and decrease regulatory discretion in response to observed misuse of the takings power or in response to informational shocks such as the intense publicity that the Kelo decision garnered.

See Somin (2011) for details about court rulings in the states, and see López et al. (2009) for analysis of the state legislative responses to Kelo.