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

Abstract

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 the 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.

The holdout problem and urban sprawl: Experimental evidence

“…Our research provides empirical insight into the holdout problem through a laboratory bargaining experiment modeled after a land-assembly game. Two other experimental approaches are presented in Tanaka (2007) and Cadigan et al (2009). Tanaka (2007) uses laboratory experiments to compare the efficiency of alternative market institutions for consolidating fragmented land.…”

“…Although focused on comparing the efficiency of alternative market mechanisms and not holdout or bargaining behavior per se, Tanaka reports strategic holdout behavior in one of his treatments, a two-sided combinatorial market with a small number of subjects and commodities. Cadigan et al (2009) examine the holdout problem through six experimental bargaining treatments that vary the bargaining institution (whether buyers or sellers make the offers), the number of bargaining periods, and the costs associated with delay. The results demonstrate that holdout is common across treatments and is, on average, a payoff-improving strategy for responders.…”

“…All of the treatments in Cadigan et al (2009), however, involved just two sellers. The focus in the Cadigan et al (2009) study was on how bargainers respond to an increase in the potential bargaining period and an increase in the cost of bargaining delay.…”

“…The focus in the Cadigan et al (2009) study was on how bargainers respond to an increase in the potential bargaining period and an increase in the cost of bargaining delay. The focus in the current paper is on the important issue of how an increase in the number of sellers affects proposals (particularly the joint offer made by the buyer and the collective demands made by sellers) and the likelihood of failed agreements, both with and without competition between sellers.…”

“…We maintain the same institutional framework as Cadigan et al (2009) by using a repeated-offer bargaining game, where the buyer makes take-it-or-leave-it offers to buy in half of the treatments, and the sellers make take-it-or-leave-it demands to sell in the others. Of the 10 total treatments, four have costless delay and six have costly delay.…”