The Problem with the Holdout Problem
Review of Law and Economics, Volume 9, Issue 2 (Sep 2013)
23 Pages Posted: 12 Nov 2014 Last revised: 20 Dec 2014
Date Written: September 1, 2013
Recent theoretical work has investigated the exact mechanism(s) by which holdouts create inefficiency and thereby justify eminent domain. Parallel work shows that state courts and legislatures either prohibit or grant discretion to local authorities to use eminent domain for economic development. This paper extends recent sequential bargaining models of strategic holdout, to incorporate political inefficiencies that may emerge when granting discretionary powers. Using eminent domain on non-holdouts 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 holdout and political sources of inefficiency.
Keywords: holdouts, eminent domain, takings, market failure, government failure
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