Contracts, Behavior, and the Land-assembly Problem: An Experimental Study

Abstract

We use multilateral bargaining experiments to examine how the order of bargaining (simultaneous or sequential) and the nature of contracts (contingent or non-contingent) affect the duration of bargaining, the efficiency of exchange, and the distribution of the surplus in a laboratory land-assembly game with one buyer and two sellers. While theory predicts an earnings advantage for the first seller when contracts are sequential and contingent, and for the second seller when contracts are sequential and non-contingent, we find that when a seller has an earnings advantage in the laboratory, it is the first seller to bargain in the non-contingent contract treatments. This result contradicts conventional wisdom and a common result from the land-assembly literature that it is advantageous to be the last seller to bargain, a so-called "holdout". We also find evidence that sequential bargaining leads to more aggressive seller bargaining and greater bargaining delay than simultaneous bargaining, ceteris paribus, and that non-contingent contracts increase bargaining delay and the likelihood of failed agreements. The majority of sellers indicated a preference for being the first seller to bargain in all sequential bargaining treatments.

The impact of bargaining delays under the threat of eminent domain

“…Are they restricted to voluntary negotiation, the use of dummy corporations, or the use of contingent contracts as suggested recently by the experimental literature? (Collins & Isaac, ; Swope et al., ). Or, are there even more tools available that could be adopted by both public and private developers alike to deal with the issue?…”

Who's holding out? An experimental study of the benefits and burdens of eminent domain

“…Several laboratory studies have examined the holdout problem. The most relevant for our research are those by Cadigan, et al (2009Cadigan, et al ( , 2011, Swope, et al (2011), Collins and Isaac (2012), Parente and Winn (2012), Shupp, et al (2013), Cadigan, Schmitt and Swope (2014), Zillante, Read and Schwarz (2014), Kitchens and Roomets (2015) and Isaac, Kitchens and Portillo (2016). We summarize these studies in Table 1, listing the treatment variables the authors studied and the primary results.…”

“…Failure rates were lowest in treatments where there was some competition among the sellers. Cadigan, et al (2011) conducted experiments in which the assembler negotiated with three landowners but needed only two parcels. Out of 64 groups none failed to assemble the necessary parcels.…”

“…Isaac, Kitchens and Portillo (2016) created competition in two ways. First, similar to Cadigan, et al (2011) and Parente and Winn (2012) they had two treatments in which a buyer faced four sellers but needed to assemble only two or three parcels. Out of 64 negotiations across these treatments assembly failure occurred in only five.…”

“…(We provide an overview of these results in the following section.) This has led some investigators to suggest that eminent domain may be a necessary tool for efficient land aggregation (Swope, et al 2011, Cadigan, et al 2011. However, to date the experimental study of efficiency under a regime of eminent domain versus secure property is limited to a single study (Kitchens and Roomets 2015) that omits several important features of the land assembly problem.…”