The Problem with the Holdout Problem

26 Pages Posted: 26 Mar 2013

See all articles by Edward J. Lopez

Edward J. Lopez

Western Carolina University - College of Business; Liberty Fund, Inc.

J. R. Clark

University of Tennessee, Chattanooga

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2013


Recent theoretical work has investigated the exact mechanism(s) by which the holdout problem creates inefficiency and thereby justifies eminent domain. In parallel, recent empirical work has demonstrated that state courts and legislatures either grant discretion to, or prohibit, local authorities from using eminent domain for economic development. This paper extends Miceli’s (2011) strategic holdout model to incorporate political inefficiencies that may emerge when granting discretionary powers. Using eminent domain for non-efficiency-enhancing purposes substitutes for voluntary exchange, which is optimal, and attracts rent seeking by developers. Therefore, the efficiency justification for eminent domain is conditional. It depends on the relative magnitudes of the market and political sources of inefficiency. This analysis informs the efficiency consequences of court rulings, most notably Kelo v. City of New London, and the various changes in states’ laws that followed.

Keywords: holdouts, eminent domain, takings, market failure, government failure, Kelo

JEL Classification: D61, D72, D73, H77, K11

Suggested Citation

Lopez, Edward J. and Clark, J. R., The Problem with the Holdout Problem (March 25, 2013). Available at SSRN: or

Edward J. Lopez (Contact Author)

Western Carolina University - College of Business ( email )

College of Business
Forsyth 315E
Cullowhee, NC 28723
United States


Liberty Fund, Inc. ( email )

11301 N. Meridian Street
Carmel, IN 46032
United States


J. R. Clark

University of Tennessee, Chattanooga

Department of Philosophy & Religion (#2753)
Chattanooga, TN 37403-2598
United States

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