The hold-out problem is much studied and has even been associated with IP disputes (especially relevant in an age where a complex device like a mobile phone can involve license agreements between hundreds of companies).
Some of the consequences being identified as a result of the hold-out problem include urban sprawl (easier to develop green-fields sites), urban decay (hold-outs prevent urban renewal), and even disruption of the innovation and investment cycle (hold-outs over-value their IP contribution and innovators then refuse to invest).
In Imminently Eminent: A Game Theoretic Analysis of Takings Since Kelo v. City of New London, Alex Hornaday proposes the following game:
- Game participants include a Developer and an Owner;
- Developer values Owner's property at $x$;
- Owner values property in a range $p_1$ to $p_2$ such that $p_1 < x < p_2$;
- Basic play:
- Developer offers price $x_1$;
- Owner either accepts or rejects $x_1$;
- if Owner rejects $x_1$, Developer may quit bargaining or offer price $x_2$;
- if Developer offers price $x_2$, Owner either accepts or rejects $p_2$;
- if Owner rejects $x_2$ and the Developer has the power of eminent domain, Developer may then choose either to do nothing or to condemn;
Hornaday also includes a penalty which the Owner would incur during round 2. He acknowledges that much of this is Pareto-inefficient as either (or both) parties are forced into a loss following an unsatisfactory conclusion.
The oversimplification here is that hold-outs tend to occur when multiple parties need to negotiate. In that case the last part to negotiate a deal is able to exert a monopoly pricing power over the other parties.
Eminent domain certainly offers the eventuality of a result (from the Developer's perspective) but can be distortionary (since either party may have insufficient negotiating power to secure an ideal result).
My answer, at this point, becomes speculative and I offer this untested as a potential model for achieving a "better" response amongst multiple parties. It is based on the concept of optimal reservation prices in auctions.
Supplementing Hornaday's game as follows:
- Developer makes a sealed reserve offer, $r_1$, for all properties from all Owners;
- All Owners make a sealed pooled reserve request, $r_2$, for all properties;
- Negotiator establishes whether $r_1$ and $r_2$ are aligned;
- If not, then an assessment (legal and social) must take place (at Developer's expense) if the Developer wishes to continue to assess whether eminent domain is even possible (not a decision, however, so pertaining to a negotiation only);
- If negotiation is possible, or if eminent domain is a viable solution to negotiation, then price negotiation can continue with all parties knowing where they stand.
We can now continue with the original game. I believe that there need to be sufficient inducements and penalties for the Owners (inducements for early settlement, penalties for holding out) to balance the Developer's costs in the process.
Obviously, if the reserve prices make a settlement unlikely and eminent domain would not be possible, then the Developer must walk away and pocket the costs of the process to that point.