Second-Best Mechanisms for Land Assembly and Hold-Out Problems

Zachary Grossman, Jonathan Pincus, Perry Shapiro and Duygu Yengin ()

No 2018-14, School of Economics and Public Policy Working Papers from University of Adelaide, School of Economics and Public Policy

Abstract: Land can be inefficiently allocated when attempts to assemble separately-owned parcels are frustrated by holdouts. Eminent domain can be used neither to gauge efficiency nor to determine adequate compensation. We characterize the least-inefficient class of direct mechanisms that are incentive compatible, self-financing, and protect the property-rights of participants. The second-best mechanisms, which we call Strong Pareto (SP), utilize a second-price auction among interested buyers, with a reserve sufficient to compensate fully all potential sellers, who are paid according to fixed and exhaustive shares of the winning buyer's offer. These mechanisms are strategy-proof (dominant-strategy incentive compatible), individually rational and self-financing. They generate higher social welfare in each problem compared to any other type of mechanism satisfying these properties.

Keywords: Land assembly; assembly problems; complementary goods; hold-out; eminent domain; property rights; mechanism design; desirable properties; impossibility theorem; second-best characterization; SP mechanism; just compensation; public-private partnerships; incentive compatibility; strategy-proofness; individual rationality; budget-balance; self-nance (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-des and nep-mic
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Journal Article: Second-best mechanisms for land assembly and hold-out problems (2019)
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