David R. Henderson  

Bruce Benson on the Holdout Problem

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My bleg about eminent domain yesterday led to a useful discussion in the comments. Dan Klein recommended that I read Bruce Benson's article, "The Mythology of Holdout as a Justification for Eminent Domain and Public Provision of Roads." I've done so. Although I think the word "mythology" in the title is too strong, I think it's a good article. Here's the part I found most useful and relevant to the discussion of rights of way for a pipeline:

A similar strategy might be used by the private buyer of a right-of-way even if it is known that a highway is going to be constructed. Suppose, for example, that the highway provider chooses more than one potential route. He then informs the land owners along the two routes that he would like to purchase specified parcels from each of them and that each should submit the price at which he is willing to sell (alternatively the developer might make initial bids that can be accepted, but indicate that each seller has an opportunity to make one take-it-or-leave-it counteroffer). In addition, potential sellers are informed that the buyer will purchase only the right-of-way with the lower total cost (a maximum might also be specified or information provided about the total acreage required on each right-of-way). Pipeline builders, for example, although their precise strategies may differ, "routinely consider alternative routes, negotiate with different groups of owners, and settle with the first group that comes up with an acceptable arrangement. Where buyers compete with competing groups of sellers, there is extra pressure on the sellers to agree to reasonable deals" (Roth 1996, 199). When a private buyer structures the bargain appropriately (for example, by secretly buying land, or by simultaneously considering alternative routes and buying the parcels only after every seller has agreed and before the project starts, or by choosing routes where landowners give up only part of their land and expect to collect increased rent on the rest), holdouts are not likely to prevent right-of-way acquisition. Indeed, as Roth notes, the first two modern privately provided highways in the United States--the Dulles Greenway in Virginia and SR-91 in California--obtained the land they required from private landowners without relying on eminent domain, choosing instead to bargain (some properties were in existing public roadway corridors, which had to be obtained from governments) (1996, 199).

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COMMENTS (16 to date)
Tom West writes:

here is extra pressure on the sellers to agree to reasonable deals

I have to admit, I'm certain this is not the intent, but it sounds a bit like outsourcing threats and intimidation to sell.

If you need 100 lots to have a project go through, I don't find it unlikely (or unpredictable) that 1 or 2 owners are willing to use extra-legal pressure on the holdouts to secure profits from the sale.

Especially considering that emotional holdouts seem likely to be concentrated among the elderly.

Matt Schreiber writes:

@Tom West:

Supposing your interpretation were true (doubtful in most cases, I suspect, but perhaps true in some). Forcible seizure en masse for 'fair' market value via eminent domain is preferable how, exactly? Or do you object generally to any means of exerting pressure on holdouts?

David R. Henderson writes:

@Tom West,
The “extra pressure,” as the article makes clear, is due to the buyer having alternatives. This is like the pressure that Macy’s felt due to existence of Gimbels.

Tom West writes:

Matt, I'm saying that the very real negatives of eminent domain must be weighed against the very real negatives of *not* using eminent domain.

I leave the weighing of those pros & cons of each to the citizens of the democracy.

(And yes, I'm familiar with the negatives of eminent domain. The hydro transmission line that ate much of my parents cottage had its original route changed because it clipped or came too close to a lot of important people's property.)

David, yes, the pressure is that the buyer has alternatives. But this means that its quite possible a holdout may cost all the non-holdouts hundreds of thousands of dollars.

Even assuming that I as a business want to avoid providing incentives towards extra-legal pressure, I'm not sure how I would avoid it. The simple existence of my offer is going to provide substantial incentive to the desperate and the not terribly ethical to go beyond the bounds.

By the way, I do find it interesting that the two highways didn't use eminent domain. I'd be curious to know how often they had to reroute when it passed through more heavily populated areas. Maybe there are fewer holdouts than the Hydro workers and my gut instinct predicted.

Just writes:

A similar thing happened with Canada's Grand Trunk Pacific - multiple route options, multiple terminus options. A lot of hold-outs including those who purchased land on potential route rumours lost a fair bit.

Presumably it would be easier with a pipeline because the government wouldn't have announced the plans in parliament before route planning could begin.

ChrisA writes:

I am very familiar with the eminent domain issue, as I work in a developing country, basically on behalf of the national government. We need to purchase large amounts of new land every year (I am talking around 300 to 400 hectares total in 50 to 70 small parcels) to deliver the projects for the government. It is doubly hard here because there is not a good registry of land; much land is formally government owned, but there is a "right of use" where someone who has farmed the land for a while effectively gets the right to use the land in perpetuity.
Previously, due to the lack of an eminent domain system, we had a not bad system based on negotiation with the "owners" of the land. Like the example in the OP we always carry alternatives, so if the owner was being difficult, either due to sentimental reasons or because he thought he could get a better price, we would drop that discussion for a while and move to a different area. Actually people (speculators) began to anticipate where we were going and were buying up the land before we got there. Contrary to expectations, that actually was helpful, now we had a business to business deal, the seller knew exactly what we were willing to pay, and the threat to move somewhere else was powerful, there are few people willing to buy the land apart from us.
After a while, based on some expensive consultants advice, the government decided to implement an eminent domain law, to "speed" up the development process. Of course we immediately entered a nightmarish bureaucracy, land buying slowed immensely and the opportunities for corruption became immense. Plus you had protesters everywhere, as many people were being forced to sell land that they didn't want to, because the system was no longer voluntary. Eventually the Government realized that the system wasn't working and they allowed us to go back to the old one. So absolutely you can build infrastructure without eminent domain, in fact it may be a better system overall.

Tom West writes:

Thanks, ChrisA, that's perhaps the most relevant data point I've seen so far.

Can you tell us which country and purpose (road/pipeline/transmission tower/sewage)? It's always nice to be precise when furnishing this fact to others.

AS writes:

@ChrisA: Your story truly demonstrates the folly of top-down design and the hubris of central planners. I'm also surprised the planners admitted fault and restored the original system.

CC writes:

ChrisA: One of the coolest comments I've read on this blog!

Tom West writes:

Your story truly demonstrates the folly of top-down design and the hubris of central planners.

Wow, that's a condemnation of every company I've every worked for.

Government and business have many differences, but top-down structure and central planning isn't one of them.

I will say, the willingness to go back *is* surprising in either business or government.

ThomasH writes:

I think much of the problem is that often the government seeks to buy the land at far less than it's going to be worth. Some of the hold out is just be have a "fair" share in the benefits of the project. The problem is worse when the reason for the government's "too low" offer is that it does not really have high confidence that the project WILL produce benefits. I think this is particularly the case with municipal "urban development" projects. Kelso was emblematic in more ways than one.

vikingvista writes:

Surely nobody is saying that there wouldn't be any such projects without eminent domain, as there are known methods (yes, secret negotiations, but also redundant negotiations where only 1 of several acceptable routes/locations will be chosen) that don't require it. But perhaps there would be fewer. How do we know that fewer is the wrong number? If violating property rights results in more such projects, perhaps more should be considered the wrong number. A strong tradition of property rights, which eminent domain undermines, surely adds something of value to free enterprise.

Tom West writes:

Please ChrisA, I'm re-iterating my request.

I know if I use your example elsewhere, I'm going to be asked for some specifics before the point will be treated as factual.

My Googling came up with nothing. (I'm assuming a smaller, perhaps municipal government, but quite frankly *any* project with a decent number of parcels like yours is *very* interesting.)

ChrisA writes:

Tom - are you the same one at Vindicating the Founders? If so I will send an email to that address.

AS writes:

"Government and business have many differences, but top-down structure and central planning isn't one of them."

Business (absent regulation) is inherently bottom-up because they require consent from those they trade with. Government does not.

Tom West writes:

Sorry, ChrisA, I was away for a few days. I am not the same one at Vindicating the Founders.

If you're willing to give the location, the email is tlwest[at]gmail.com. This is entirely for use in conversations, etc., so if you aren't entirely comfortable, don't worry about sending it. I am a spokesman for nothing (and usually on the other side of these things, but delight in being proven wrong - and this is perhaps the best counter-example to my instincts I've heard.)

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