Dealing with eminent domain

• We adapt Moresi, Salop, and Sarafidis, 2008 sequential-Nash-bargaining model to the case of land assembly with eminent domain and contingent contracting.
• We test the predictions of this model in a laboratory setting.
• We find the model does well in modeling subject behavior in the case of eminent domain.
• We find the model does a poor job in modeling subject behavior in the case of contingent contracting.

In light of the U.S. Supreme Court’s recent decision, Kelo vs. New London, there has been a renewed interest in problems dealing with the acquisition of perfectly-complementary inputs, specifically in the context of land assembly and eminent domain. Using a sequential-Nash-bargaining model we examine a scenario where a buyer can purchase N identical properties from N queued sellers. We examine the scenario with respect to two bargaining processes, (i) where each contingent price must be agreed upon by buyer and seller, (ii) where the buyer has an additional option to execute a transaction at a predetermined price for a fee. Using the first mechanism, theory predicts, given equal bargaining weights, that sellers who are later in the queue will receive lower prices. Using the second mechanism, theory predicts that prices should be equal when sellers have equal bargaining weight. We experimentally test these predictions and find evidence that welfare is maximized in both treatments, and that price predictions in the second protocol align with the theory.