The Holdout Problem

Economics Economics Questions
1

The Holdout Problem: “the holdout problem has been defined in many ways. Properly understood, it is a form of monopoly power that potentially arises in the course of land assembly. Once assembly begins, individual owners, knowing their land is essential to the completion of the project, can hold out for prices in excess of their opportunity costs.” http://digitalcommons.uconn.edu/cgi/viewcontent.cgi?article=1151&context=econ_wpapers

Simple English: The holdout problem is basically when someone is trying to build a road or a shopping center or some other such thing, and people refuse to sell their property for a price they’d normally accept because they know the developer will pay more. They’re “holding out” for a higher price. When too many sellers “hold out,” they can collectively push the asking price beyond the developer’s willingness to pay, therefore scuttling the project. The holdout problem is used to support eminent domain.

The Solution: “private developers, who lack the power of eminent domain, have managed to circumvent the holdout problem by concealing the plans for the properties being acquired and by using contingent contracts. For example, a developer who intends to acquire a large number of individual parcels of land for a shopping center will keep his plans a secret, and have others buy the properties for him, one at a time. In addition, the properties will often be purchased with options, giving the developer the right to rescind in the event that all the properties required for the project cannot be acquired for less than a specified amount.” pg. 77, “Economic Foundations of Law,” by Stephen J. Spurr

2

If one wants to purchase access to some land, who is to say what that price should be? I don’t see the problem here.

3

You want to build a road. Suppose you need to buy 1,000 different parcels, each owned by a different individual, in order to build your road. Each owner values his parcel at $8,000. Thus the land has an aggregate value of $8 million to its owners. You value that land at $10 million. If too many landowners know about your intentions, and “hold out” (begin demanding higher prices than they would otherwise), then the total asking price could exceed $10 million, and the mutually beneficial transaction would not occur.

The problem is that the landowners have monopoly power (there is no substitute for their land) and that they are unable to coordinate (due to high transaction costs*). So if everyone starts demanding higher prices, you’re unable to purchase the land and go through with your project.

Of course this is a highly hypothetical situation, but it has real-world applications. This isn’t a problem that exists solely in neoclassical theoretical land.

The point of the OP was to show a free-market solution for the holdout problem.

*Sometime in the future I’ll be posting a thread about how the free market has solved high transaction costs in the music industry. Yay!

4

That isn’t monopoly power. The road can be built somewhere else. It can curve and bypass holdouts.

This “problem” can apply to anything. If I know you really want my car, I can ask for twice what I would normally take because I percieve that you will pay a high price.

This is only a problem for one party. The land seller will take an offer if he believes it is the best he can get.

5

Related to this is Walter Block talking about Options in “The Privatization of Roads And Highways” p. 18:

6

Yeah, this is what I am going with. You have some project you want to do, someone else doesn’t want to sell you stuff you need to do it with. Tough $h1t, go cry me a river.

That isn’t monopoly power. The road can be built somewhere else. It can curve and bypass holdouts.

Nothing is ‘monopoly power’, ‘monopoly’ theory is absolute rubbish with no logical content.

7

MMMM think again:

Emphasis added.

There are generally good substitutes available for cars, unless you have a custom made car.

You’re missing the point. If you’re dealing with one seller, even if that seller has a monopoly power, you can still come to a mutually-agreed price. However, the more sellers you have to deal with, the harder it gets, because each seller has an incentive to demand as much as possible from you. When each seller does this, this can easily push the price of all of the parcels you want to buy beyond what you’d be willing to pay.

The problem would be easily solved if the sellers could just cooperate, but this isn’t always possible. Sometimes, transaction costs could be prohibitively high. Other times, the cooperation could break down, similar to how cartels break down, just that in this case, each seller would have an incentive to break from the pact to raise their own prices.

Good point. I wonder how practical it is to purchase options on multiple sites. Does Walter Block discuss the transaction costs associated with this? Are there any real world examples?

I’m gonna have to read that book. (:

That isn’t the problem presented…

The fact of the matter is that monopoly power is pervasive in human society, an excellent example is custom-made products (a problem of bilateral monopoly).

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The fact of the matter is that monopoly power is pervasive in human society, an excellent example is custom-made products (a problem of bilateral monopoly).

Praxeological nonsense. Every product competes with every product, and every sale is a unique subjective event. Everything is a monopoly and a monoposony or nothing is; either way the concept is worthless.

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So… then a road does not get built.

How is that a problem?

10

He is basically appealing to some sense of ‘efficiency’, which is a load of bull hockey. The ‘holdout’ valued his land more than the people who wanted to build the road. Too bad for them.

And, again, ‘monopoly power’ is nonsense. It literally means nothing.

11

Ok, I have thought again… Yes the road can be built somewhere else. It can indeed curve and bypass holdouts via substitute land. You dismiss this argument out of hand when I make it. But when it comes from Walter Block, you appreciate it.

Thare are good substitues for land. Other land…

There are also substitues for roads. Airports, for example.

12

You can argue semantics, call something “nonsense,” and then make broad generalizations, but by the end of the day you have not proven a damn thing.

It’s a problem because a mutually beneficial transaction that would have occurred does not because of a failure to coordinate on the side of the sellers.

The holdout problem is not about somebody who values their land more than what someone else was willing to pay for it. It’s about multiple sellers trying to get the most out of a single buyer and the mutually advantageous, positive sum transaction not occurring because the sellers cannot coordinate with each other.

I wasn’t hating on you or anything, sorry if it came off that way. The way I took it, you were arguing against the specific example I gave. Tex and the Walter Block quote he provided aren’t arguing that the holdout problem is nonexistent or anything of that sort. In fact, Tex provided it as another example of using options. I also questioned the practicality of that approach, though it certainly is possible and interesting.

Now, the specific example I gave explicitly stated that there is no good substitute for the land. And this isn’t some kind of far-out assumption, oftentimes this is the case, i.e. in crowded cities and so forth. Oftentimes, a developer is looking for a very specific site to develop, something that is on important crossroads or in the town center, etc. (I’m not speaking only of roads here, but also shopping malls, residential centers, factories and other large projects which can run into the holdout problem).

And the solution I provided (I didn’t really provide it, but Dr. Spurr did in his book, and I’m sure he was referring to the arguments of other legal/economic scholars) was designed for those kinds of cases.

I’m not exactly sure what the big hutzpah is here, I’m not claiming anything radical here. I’m simply pointing out at a problem which has been used to justify eminent domain and I show how it can and has been shown voluntarily, through free markets.

Again, that’s not necessarily the case.

And again:

  1. The example I provided doesn’t apply only to roads.

  2. Air travel can be much more expensive than land travel in certain conditions, depending on the distance traveled and other factors.

13

You can argue semantics, call something “nonsense,” and then make broad generalizations, but by the end of the day you have not proven a damn thing.

Because Rothbard smashed your nonsense for me.

The holdout problem is not about somebody who values their land more than what someone else was willing to pay for it. It’s about multiple sellers trying to get the most out of a single buyer and the mutually advantageous, positive sum transaction not occurring because the sellers cannot coordinate with each other.

This is gibberish. The two are exactly the same. If a person is withholding his property from sale it is because his expected returns at some other point of sale is higher. You are making arbitrary, praxeologically meaningless distinctions.

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For those of us who aren’t as well versed in the arguments you claim are so “smashing,” could you outline them a bit, please? Rough overview would be excellent. I at least have an idea what Kaju is talking about. I have nothing but your assertions with regard to this specific statement.

15

Actually, he did not.

I have already answered your objection. Your objection is even answered in the OP (read the definition). This isn’t about somebody withholding sale because they expect higher returns, or a higher bidding price from somebody else, or because somebody just values their own property so much more. It’s about somebody withholding sale because they’re trying to extract as much as possible from the buyer. This isn’t a problem when one seller does it with one buyer, because they can easily settle on a price which satisfies both. But if you have multiple sellers who are trying to extract as high a price as possible from the buyer, and those sellers do not coordinate/cooperate with each other, then all together their asking price could exceed the buyer’s willingness to pay.

Again, going to the cartel example. Cartels fail because it’s profitable for one of the producers to undercut the cartel and produce more. Likewise, an attempt at purchasing many parcels of land can fail because each landowner has an incentive to ask for as high a price as possible. Of course, everyone (including the landowners) would benefit if they limited their asking price to the willingness to pay by the buyer. But in each individual case, the individual landowner has an incentive to have his neighbors limit their prices while he raises his own.

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It’s about somebody withholding sale because they’re trying to extract as much as possible from the buyer.

WHICH IS WHAT EVERY SELLER DOES, WTF? This is ridiculous.

Also, the cartel thing is wrong. Cartels are like half-corporations, and they work when the right conditions exist for restricting production. Excepting government intervention the amount of production that produces the highest rate of profit is the most efficient use of resources. There is absolutely no, NO, NONE, ZERO, EVER way to even THINK of the possibility of allocation of resources outside of profit and loss; any seperation of actual realized profits and economic efficiency is bogus nonsense.

You make no sense.

17

I guess the situation is in a way similar to barter exchange before money develops - the persons coulda woulda be better off by trading, but there is no feasible mechanism to facilitate the exchange, so the reasonable action of any single person is not to exchange.

The missing mechanism in barter situation is money, which no single participant can provide, but the whole society eventually develops.

Could the same apply to the holdout problem - the market will evolve a new mechanism?

Money is not a unique example, the same point can be supported by other mechanisms: stock exchange and auctions, to name just two.

18

I know. I never denied that. In fact, I implicitly acknowledged that.

You have again failed to answer my argument. I have never said anything about efficiency not having to do with the highest rate of profit or that resources should be somehow allocated “outside of profit and loss.” I never said anything about economic efficiency, Pareto-optimal, Kaldor, or otherwise. All that I said about cartels is that they each individual member of the cartel has an incentive to break away and increase production, an argument which has been used by many free market economists, Austrian and non-Austrian alike.

You’re turning something relatively simple into something that’s outrageously complex, all the while throwing insults around and trying to discredit me. And you have still failed to answer my argument, despite calling it “ridiculous” and “praxeological nonsense,” and despite claiming that Rothbard “smashed” the argument I am presenting. You’re being incoherent and doing nothing but derailing this thread.

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Yes. Those “mechanisms,” if you will, are the solutions provided in the OP, by Dr. Stephen Spurr, and the solution provided by Walter Block a few posts after the OP.

20

Interesting question. I’ll be glad to ponder some and reply with a fuller response later.

Meanwhile, I thought it interesting to note how dogmatic some of these posters are in defense of what they perceive to be free market ideals. It seems like some of them cannot accept the thought that anything close to a monopoly can exist, presumably because it would undermine the free market and give support to statist ideas.

I would tend to agree with the original poster, who recognized that monopolies happen frequently and should be considered in full in order to overcome them. This doesn’t mean that the government needs to come in and control things, just that we need to figure out a solution to a plausible problem. Neglecting the problem or just shrugging it off is not constructive at all.