Buying Up the Block: An Experimental Investigation of Capturing Economic Rents Through Sequential Negotiations

41 Pages Posted: 7 Jun 2005

See all articles by Gautam Goswami

Gautam Goswami

Fordham University - Finance Area

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: March 2005

Abstract

This paper develops and experimentally implements a simple multi-negotiation bargaining game, in which one agent, called the "developer," must reach agreements with a series of other agents, called "landowners," in order to implement a value-increasing project. The game has a unique subgame perfect Nash equilibrium under which the surplus from the project is split between the landowner and developer without any dissipation of value. In the actual experiments, however, on average almost half of the value of the project was dissipated. The costs of dissipation fell disproportionately on the developer, who was able to capture less than 5% of the value generated by the project. The results of this experiment call into question the ability of private negotiations between a large number of parties, even in a world without explicit contracting costs, to induce Pareto-optimal allocations of property rights.

Keywords: Sequential bargaining, Coase Theorem, experiment

JEL Classification: C78, C91

Suggested Citation

Goswami, Gautam and Noe, Thomas H. and Wang, Jun, Buying Up the Block: An Experimental Investigation of Capturing Economic Rents Through Sequential Negotiations (March 2005). Available at SSRN: https://ssrn.com/abstract=738604 or http://dx.doi.org/10.2139/ssrn.738604

Gautam Goswami

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States
212-636-6181 (Phone)
212-765-5573 (Fax)

Thomas H. Noe (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

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