Holdout Problem Research Articles

Holdout: Existence, Information, and Contingent Contracting

The holdout problem permeates policy discussions of legal issues involving bargaining for land acquisition and more broadly impacts multilateral bargaining between agents. Laboratory experiments investigate the scope of the holdout problem. The research strategy incorporates as treatment variables available information and the exposure problem arising from the unavailability of contingent contracts. An examination reveals that holdout can reliably produce large inefficiencies and lost opportunities for mutually advantageous trade. The introduction of contingent contracts facilitates successful bargaining. However, buyers are not made significantly better off by contingent contracts.

Land Assembly and the Holdout Problem Under Sequential Bargaining

Although the holdout problem is an established part of legal and economic lore, the exact source of the problem is not well understood. It is usually attributed to high transaction costs or bargaining power on the part of sellers. To isolate the essential features of the problem, we consider the simplest possible setting in which a buyer bargains sequentially with a series of sellers, each of whose land is necessary to realize the gain from a large-scale project. Using ordinary Nash bargaining and assuming complete information, we identify a minimum set of factors that give rise to a holdout problem. Copyright 2012, Oxford University Press.

Holdups and holdouts: What do they have in common?

The holdup and holdout problems arise in different contexts, but they share certain fundamental similarities that have not generally been recognized. This paper characterizes the commonalties between the two problems and their remedies.

A Group Utility Maximizer Mechanism for Land Assembly

Buyers requiring large parcels of land for development purposes engage several owners in a bilateral trade seeking monetary payment in exchange for land – a business transaction most often referred to in the literature as the problem of land assembly. To avoid the holdout problem which is a typical consequence of such negotiations necessitates a good pricing strategy that meets the subjective valuation considerations of the owners and protecting property rights to warrant a fair and efficient outcome. Several approaches have been proposed in the literature that includes contributions from game theory in the form of Nash bargaining, Bayesian theory for incomplete information, auction theory and Mechanism Design which have individually enriched this field and proposed credible solutions. In this paper, we consider a setting that has a single buyer and N sellers. We take a Mechanism Design approach to study the assembly problem in a utilitarian framework, where we associate risk-averse utility functions with the sellers. Given a set of reserve prices reported by sellers, and their risk-aversion behaviour, we seek an incentive-compatible mechanism that simultaneously maximizes the sum of individual expected utilities while delivering a Pareto optimal per-seller penalty-reward structure. We show how this mechanism, inspired and adapted from the actuarial Risk Exchange concept in the Insurance industry, can be fruitfully applied to the land assembly problem, yielding an efficient and optimal solution to the holdout problem, while making very minimal demands on knowledge of sellers valuations. The working of the mechanism is illustrated with a simple example.

Transparency, complementarity and holdout

This article characterizes the conditions under which holdout (i.e. bargaining inefficiency) may, or may not be significant in a two-sided, one-buyer-many-seller model with complementarity. Our central result is that the severity of holdout (i.e. inefficiency) is critically dependent on three issues, (a) the transparency of the bargaining protocol, (b) the outside option of the buyer, and (c) the marginal contribution of the last seller. We find that although the accepted wisdom that holdout is severe, goes through whenever either the buyer has no outside option, or the bargaining protocol is secret, the holdout problem however is largely resolved whenever either the bargaining protocol is transparent and the buyer has a positive outside option, or if the marginal contribution of the last seller is not too large.

Holdout in the Assembly of Complements: A Problem for Market Design

Holdout problems prevent private (voluntary and self-financing) assembly of complementary goods—such as land or dispersed spectrum—from many self-interested sellers. While mechanisms that fully respect sellers' property rights cannot alleviate these holdout problems, traditional solutions, such as the use of coercive government powers of “eminent domain” to expropriate property, can encourage wasteful and unfair assemblies. We discuss the problems holdout creates for the efficient operation of markets and how previous approaches have used regulated coercion to address these challenges. We then investigate when encouraging competition can partially or fully substitute for coercion, focusing particularly on questions of spectrum allocation.

‘The Re Tea Corporation principle and junior creditors’ rights to participate in a scheme of arrangement – a view from Singapore'

AbstractThis paper examines the application of the principle derived from Re Tea Corporation's case in recent schemes of arrangement to break negotiation deadlocks between senior and junior creditors of a financially distressed company. This paper argues against an overly technical application of the principle in Re Tea Corporation's case which might work injustice towards junior creditors by effectively shutting them out of a restructuring. This paper further explores how the holdout problem, which led to the formulation of the Re Tea Corporation principle in the first place, could be addressed while balancing the competing interests of junior claimants in a scheme of arrangement. Copyright © 2011 John Wiley & Sons, Ltd.

Free riders, holdouts, and public use: a tale of two externalities

Free riders and holdouts are distinct market failures that potentially impede the completion of otherwise beneficial transactions. The key difference is that the free rider problem is a demand side externality that requires taxation to compel payment for a public good, while the holdout problem is a supply side externality that requires eminent domain to force the sale of land for large scale projects. This paper highlights the distinction between these two problems and uses the resulting insights to clarify the meaning of the public use requirement of the Fifth Amendment takings clause.

Concordance Among Holdouts

Holdout problems prevent decentralized aggregation of complementary goods, but the coercion required to overcome holdout may encourage abuse and violate fairness standards. We propose second-best efficiency, abuse-prevention, and fairness criteria for procedures intended to reduce holdout. Our criteria are jointly satisfied by a class of “Concordance” procedures. In these procedures, the prospective buyer makes a take-it-or-leave-it offer to the group of sellers, and the sellers use an efficient collective choice mechanism to decide as a group whether to accept the buyer’s offer. In the case of sale, the buyer’s offer is divided among the sellers in a fashion independent of individual sellers’ actions. Each seller retains the option to receive, in the event of sale, her share of the offer (without making any additional payments) in exchange for not influencing the collective decision. Our approach is applicable in a range of contexts including land assembly, spectrum aggregation, corporate acquisitions, and patent pool formation.

An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game

When an economic exchange requires agreement by multiple independent parties, the potential exists for an individual to strategically delay agreement in an attempt to capture a greater share of the surplus created by the exchange. This “holdout problem” is a common feature of the land‐assembly literature because development frequently requires the assembly of multiple parcels of land. We use experimental methods to examine holdout behavior in a laboratory bargaining game that involves multi‐person groups, complementary exchanges, and holdout externalities. The results of six treatments that vary the bargaining institution, number of bargaining periods, and cost of delay demonstrate that holdout is common across institutions and is, on average, a payoff‐improving strategy for responders. Both proposers and responders take a more aggressive initial bargaining stance in multi‐period bargaining treatments relative to single‐period treatments, but take a less aggressive bargaining stance when delay is costly. Nearly all exchanges eventually occur in our multi‐period treatments, leading to higher overall efficiency relative to the single‐period treatments, both with and without delay costs.

Economics of Regionalism in Megalopolis

By applying the economic theories to the legal scholarship, contemporary legal studies have undergone a radical change since the advent of such an approach especially in the United States legal academies. One of the most critical arenas that the economic analysis of law is concerned with is the issues subject to study in the local government law and urban studies. One of the biggest concerns in this field is the problem of the “size”. Concepts like zoning, incorporation, annexation, consolidation and regionalism are dominating issues in this branch of legal studies. The common element in all of these issues is undoubtedly the “size” which is effecting the local governments one way or another. On the other hand, the economists have dealt with the problem of size for a long time and they always tried to find a logical relationship between the efficiency of a firm and its size. The problem of size in Urban Studies and Local Government Law literature is merged into the dichotomy of localism and regionalism.In this paper, my primary purpose is to explain the size of local governments by applying economic methods of thinking. In this regard, at first, after briefly introducing localism, I will try to show its economic inefficiencies. By emphasizing the inefficiencies of local approaches in solving regional problems in megalopolises, it will be argued that save having a regional approach, many unavoidable flaws will emerge. In this regard, I will try to show that the sources of economic inefficiencies in local approach to regional problems are multifold. First and foremost, these inefficiencies arise from the diseconomies of scale including costs of communication among municipalities, duplication of efforts and cannibalization in locally fragmented megalopolis. The other sources of inefficiencies are the tragedy of the commons and anticommons in the region, positive and negative externalities producing free riding, gentrification, environmental problems and sprawl. Last but not least, the problem of high transaction costs and hold-out problem for the municipalities to come together to contrive a solution for the regional problems will be discussed. Eventually, taking the socio-political concerns like problem of representation and paradox of voting, the sense of community and the like into account, I will argue in favor of the coexistent model of localism and regionalism, as an idea to minimize the economic inefficiencies arising from the purely local approach to regional problems in megalopolises.

The End of Objector Blackmail?

Courts and commentators have long been concerned with holdout problems in the law. This Article focuses on a holdout problem in class action litigation known as objector “blackmail.” Objector blackmail occurs when individual class members delay the final resolution of class action settlements by filing meritless appeals in the hope of inducing class counsel to pay them a side settlement to drop their appeals. It is thought that class counsel pay these side settlements because they cannot receive their fee awards until all appeals from the settlement are resolved. Although several solutions to the blackmail problem have been proposed, both courts and commentators appear unaware that class counsel have quietly devised their own solution: class action settlement provisions (known as “quick-pay” provisions) that permit them to receive their fees even before appeals from the settlements are resolved. Drawing on an original data set of all class action settlements approved by federal judges in 2006, I show that over one-third of all settlements already have quick-pay provisions, including the vast majority of securities settlements. This Article both brings to light quick-pay provisions and evaluates whether they are a better solution to the blackmail problem than those proposed by courts and commentators. Although quick-pay provisions can mitigate much of the blackmail threat without the collateral damage caused by other proposed solutions, the provisions have several serious limitations. Instead, I propose a new solution to the blackmail problem: an inalienability rule that prohibits objectors from settling appeals unless their settlements include a modification of the underlying class action settlement agreements.

The influence of managerial incentives on the resolution of financial distress

This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model’s prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms.

The Holdout Problem and Long-Term Contracting

The holdup problem of under-investment in specific capital has been studied extensively. Less attention has been paid to the problem of over-investment in outside options. A buyer's gain from (unverifiably) developing an outside option exceeds the joint gain, given rent shifting when an inferior option binds in subsequent bargaining with the seller. Long-term contracts can solve holdout by increasing the buyer's surplus from trade within the relationship. With a nonbinding contract, however, the seller's participation constraint may require the buyer (who may be financially constrained) to pay a large signing bonus. This suggests a novel motive for vertical integration.

The holdout problem, urban sprawl, and eminent domain

Developers attempting land assembly often face a potential holdout problem that raises the cost of development. To minimize this extra cost, developers will prefer land whose ownership is less dispersed. This creates a bias toward development at the urban fringe where average lot sizes are larger, resulting in urban sprawl. This paper examines the link between the holdout problem and urban sprawl and discusses possible remedies, including the use of eminent domain for urban redevelopment.

A Bargaining Model of Holdouts and Takings

The holdout problem is commonly cited as the justification for eminent domain, but the nature of the problem is not well understood. This article models the holdout problem in a bargaining framework, where a developer seeks to acquire several parcels of land for a large-scale development. We show that in the absence of eminent domain, holdouts are a significant threat, resulting in costly delay. However, if the developer has the power to use eminent domain to acquire the land from holdouts, all sellers will bargain, thus avoiding delay. An offsetting cost is that owners may negotiate prices below their true value, possibly resulting in excessive transfer of land to the developer.

Debt restructurings, holdouts, and exit consents

This paper investigates the use of exit consents in a sample of bond exchange offers during 1986–1997. We find that exit consents are common, approximately 56% of the exchange offers in our sample have them and 60% of the exit consents are by non-financially distressed firms. Using a probit model, we find that a set of variables that proxy for holdout problems is able to significantly explain the use of exit consents. Reducing holdouts is necessary for timely and efficient debt restructurings and achieving financial stability particularly in sovereign debt markets.

Resource Allocation with Spatial Externalities: Experiments on Land Consolidation

Abstract This paper compares the performance of a two-sided combinatorial call market, direct negotiation, and double auction for consolidating fragmented land. Experimental results suggest direct negotiation produces higher efficiencies than other mechanisms. The combinatorial call market tends to alleviate the exposure problem, and performs well when 1) swapping is easily agreeable, and 2) the number of subjects and commodities are increased and the initial endowments are unchallenging. The two-sided combinatorial call market, however, suffers from the holdout problem when the number of subjects and commodities is small.

Options Contracts for Contingent Takings

Disasters are low-probability situations with high potential losses. Shortly before and during some disasters, government use of private property may reduce losses to others that strongly outweigh the costs imposed on the property owner, implying significant net benefits. Coercive takings or attempts to contract at the time of the emergency will frequently be defeated by transactions costs. We propose a policy tool to realize the available net benefits: options contracts for contingent takings. Such contracts between the government and private parties allow the government to take property in the event of a low-probability event that would make the property much more valuable in government hands. In exchange for such use, the property owner is compensated, in part up front and in part when the option is exercised. Setting the exercise payment equal to the cost of losses promotes efficiency in both risk spreading and the incentives for exercise. Options contracts of this form will be valuable in a range of settings, from improving disaster response by guaranteeing a flow of needed supplies, to reducing potential damages by diverting floodwaters to low-value lands, or even to helping ensure the survival of some endangered species. The moral hazard and hold-out problems that may afflict such contracts can be controlled.

Irrigation Institutions in the American West

ABSTRACT The history of irrigation organizations during the late nineteenth and early twentieth centuries in the arid and semi-arid American West reveals the important role of experimentation in determining the institutional forms that evolved. The legal framework was such that a wide variety of bottom-up organizations developed to deal with transaction cost problems. Contracting was complicated by asset specificity, potential spillovers between users, free-riding, and holdout problems. Asset specificity on the part of both farmers and irrigation infrastructure owners should have led to vertical integration with a single firm owning both the farmland and the infrastructure. However, the differing economies of scale between capturing and delivering irrigation water and farming meant that vertical integration would have resulted in costly operations. Instead of vertical integration or the separate ownership of farms and irrigation infrastructure, western farmers sought out intermediary institutions. In some cases, simple contracts among a few farmers were sufficient to divert water from streams and to carry it to crops. In other cases, a developer would form a commercial irrigation company, buy a large block of land, install irrigation infrastructure, and then sell off farms. However, the commercial irrigation company did not provide solutions to transaction cost issues; instead, it was fraught with transaction cost problems that undermined its usefulness. Mutuals, both incorporated and unincorporated, allowed farmers to contract with other farmers to own and operate irrigation facilities. Irrigation districts, a form of localized government with coercive powers, were authorized in all of the western states. These districts became another significant form of irrigation organization. I. INTRODUCTION II. THE TRANSACTION COSTS OF IRRIGATION III. COMMERCIAL IRRIGATION COMPANIES AND THE PROBLEM OF TRANSACTION COSTS IV. TRANSACTION COSTS OVERCOME--MUTUALS AND IRRIGATION DISTRICTS A. Unincorporated Mutual Associations B. Mutual Irrigation Companies 1. The Nineteenth Century Revolution in Corporate Law 2. The Institutional Form of Mutual Irrigation Companies 3. Mutual Irrigation Companies and Transaction Costs C. Irrigation Districts 1. The Formation of Irrigation Districts 2. The Financing of Irrigation Districts 3. Irrigation Districts and Water Rights 4. Irrigation Districts and Transaction Costs.. V. CONCLUSION I. INTRODUCTION Aridity is a defining characteristic of the American West, and the application of water to land is a central theme in the history and development of the seventeen coterminous western states. As late as 1875, W.B. Hazen, an army officer who served in the West, claimed that all the land between the hundredth meridian and the Sierra Nevada was uninhabitable and that 'emigration to these places known not to be arable, be emphatically discouraged.' (1) Others were more optimistic about the settlement of the West if the problem of irrigation could be solved. In 1896, the legal scholar William P. Aiken wrote: The economic future of the far west is largely dependent on a practical solution to the problem of irrigation. Millions of acres lie there sterile and lifeless, yet with all the elements of fertility locked up in the soil, and with sunshine and a climate favorable to every kind of agricultural production. The nimble jugglery of the statistician does not enable one to grasp the situation. Square acres of maps and huge columns of figures convey but a dim impression of the urgency of the problem. Only the traveler who has passed over the vast solitudes and witnessed the transformation wrought here and there by some unknown Aaron of the wilderness can appreciate the enormous forces of nature waiting for a deliverer. …