Land assembly with taxes, not takings

ABSTRACT

We use a novel tax mechanism – ‘rejected offer reassessment’ (ROR) – in laboratory experiments to discourage seller holdout and facilitate land assembly. Under this mechanism, if a landowner rejects a developer’s offer, his taxable property value is reassessed to be equal to the rejected offer, increasing his taxes. We find that, relative to a control treatment, ROR discourages the magnitude of seller holdout (but not its frequency) and increases the rate of successful land assembly by almost 60%. It also increases the gains from trade by 22.1% relative to the control treatment, but the difference is not statistically significant.

KEYWORDS:

• Land assembly
• holdout
• taxation
• real estate

JEL CLASSIFICATION:

• H20
• K34
• R52

Disclosure statement

The authors of this paper received a research grant from the Mercatus Center. The grant was for a total of $7,500, of which each author received $2,500 as a stipend. Fifty per cent of this stipend was paid upon submitting an initial draft of the research findings. The remaining 50% was paid once the final draft was accepted after a round of peer review.

The Mercatus Center had no financial or professional interest in the results of the experiments presented in this paper. Moreover, the authors preregistered their hypotheses and statistical design with the Center in advance. We therefore declare no conflict of interest with the Mercatus Center.

Doug and Marion Lee gave one of the authors, AW, a gift of $250 for his professional use. This money was used to defray the expenses of participant payments. Mr. and Mrs. Lee are retired and not interested parties. AW and MD paid for the remaining participant earnings from their research budgets at Chapman University.

Data Availability

The data that support the findings of this study are available from the corresponding author, AW, upon reasonable request.

Notes

¹ Holdout has been observed in laboratory experiments by e.g. Cadigan et al. (2009, 2011), Swope et al. (2011), Parente and Winn (2012), Collins and Isaac (2012), Zillante, Schwarz and Read (2014), Swope, Cadigan and Schmitt (2014) and Winn and McCarter (2017). Brooks and Lutz (2016) and Portillo (2017) report field data consistent with seller holdout.

² A Heckman selection model found no significant correlation between the error terms of the frequency and magnitude models (ρ = − 0.05, SE = 0.07, 95% CI = −0.18–0.08). Thus, we estimate the models separately for ease of interpretation.

Additional information

Funding

This research was supported by the Mercatus Center.