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The hold-out problem often occurs in debt-restructuring or in urban development.

The hold-out problem is defined where an agent, for example a land developer, must negotiate with many lot owners and each lot owner must provide their consent in order for a project to proceed. However, since the agents know that their consent is required they can extract a portion of the producer surplus in excess of their opportunity costs. The net effect is that such large-scale projects are underproduced.

There are legal remedies to address this underproduction. Eminent domain is a legal tool to overcome hold-out problems, however, it does not consider pareto-efficiency. It's not at all clear whether developers that exercise eminent domain are increasing social welfare or simply have better influence over a political process to transfer resources from one group to another.

Ideally, we would like a voluntary bargaining solution that all (or most) parties agree to that produces a socially efficient amount. A bargaining solution should always be arrived at when the social utility of the production exceeds the opportunity costs of each individual and the producer cost.

What bargaining "game" could be designed (and enforced or enabled by a legal process) so that such a procedure could be applied to hold-out problems?


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Very good question. I think there's something in some of the more esoteric auction models that may be useful. I'll have a hunt... –  Turukawa Nov 8 '11 at 6:42
@Turkuawa - that would make sense... To your point, there are various auctions designed for bidders to bid their true reservation price –  Quant Guy Nov 8 '11 at 12:37
I can give you an answer, but I'm afraid it'll be a little speculative. There is a good body of research, but it simply repeats the quandaries you mention in your question (Eminent domain, with all the moral hazard involved). The consequences are also interesting... –  Turukawa Nov 8 '11 at 17:18
I've updated my answer to include a recent paper by Miceli published in Public Choice. He models a noncooperative strategic game with an eye toward applicability for housing development. You might want to check it out. –  jrhorn424 Nov 15 '11 at 22:26