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

Abstract

Purpose – Land assembly can mitigate the negative environmental impacts of land fragmentation on urban areas, agriculture, and wildlife. However, the assembler faces several obstacles including transactions costs and the strategic bargaining behavior of landowners. The purpose of this chapter is to examine how the order of bargaining and the nature of contracts may impact the land assembler's problem.Methodology – We develop theoretical predictions of subjects' behavior and compare these to behavior in a laboratory land-assembly game with monetary incentives.Findings – Sellers bargain more aggressively when bargaining is sequential compared to simultaneous. Noncontingent contracts increase bargaining delay and the likelihood of failed agreements. Buyers and sellers act more aggressively when there are multiple bargaining periods, leading to significant bargaining delay. When a seller has an earnings advantage in the laboratory, it is the first seller to bargain in noncontingent contract treatments. In sequential bargaining treatments, most sellers preferred to be the first seller to bargain.Research limitations – Our laboratory experiments involved only two sellers, complete information, and costless delay. Land assembly in the field may involve many sellers, incomplete information, and costly delay.Practical implications – Some of our results contradict 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.” Our results also imply that fully overcoming the holdout problem may require subsidies or compulsory acquisition.Originality – This chapter is one of the first to experimentally investigate the land-assembly problem, and the first to specifically examine the role of bargaining order and contract type.

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