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Price of development is highest in last mile

Posted on May 8, 2015October 7, 2023 By Dharmedra

Economists and developers have long recognized the challenge posed by the holdout problem, particularly in the assembly of contiguous yet separately-owned land parcels for large-scale development projects. Despite extensive discussions and concerns raised by policymakers, a precise understanding of the holdout problem has remained elusive. While it has been vaguely attributed to factors like monopoly power or high transaction costs, a clear description of its exact nature has been lacking.

This paper introduces a novel theory of the holdout problem that avoids ad hoc assumptions, instead demonstrating its emergence from ordinary Nash bargaining dynamics between a buyer and a sequence of sellers. Each seller owns land crucial for the completion of a development project, and the theory predicts that prices will incrementally rise as the assembly progresses, culminating in the final seller receiving the highest price.

Moreover, the model suggests that the total sum paid to all sellers will surpass the aggregate reservation prices of the sellers (reflecting the opportunity cost of the project). This occurs in cases where individual parcels hold less value for the buyer than for the sellers themselves. According to the paper, this scenario epitomizes the paradigmatic holdout problem, highlighting why some efficient projects may be abandoned in the absence of government intervention to enforce sales.

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