The Hold-Out Problem

Flavio Menezes and Rohan Pitchford
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Rohan Pitchford: Australian National University

No 1672, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: Suppose a developer wants to buy n adjacent blocks of land that are currently in the possession of n different owners. The value of the blocks of land to the developer is greater than the sum of the individual values of the blocks for each owner. Under complete information about individual valuations, the developer could make a take-it-or-leave-it simultaneous offer to all owners equal to their valuations. The owners would accept the offers, the outcome would be efficient and the developer would get all the surplus. On the other hand, if the owner were to negotiate with the owners sequentially, the final division of the surplus would depend on who would have make the final offer. This individual would end up with the entire surplus and the efficient allocation would be implemented but at the expense of costly delay. Given the possible advantage that arises from being the last to make an offer, players may strategically delay the start of a negotiation. This is the hold-out problem that we examine in this paper. We develop a model in which players decide on the probability that they will go to the negotiating table with the developer. We characterise the full set of equilibria as they correspond to functions of owners valuations, and the developers valuation of subsets of land. Hold out occurs when the developer's valuation of individual blocks is the same as individual owners valuations, or if the valuation of all of the blocks of land by the developer is sufficiently large.

Date: 2000-08-01
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