March, 2019

Land-Assembly and Externalities

How do positive post-development externalities affect land aggregation outcomes?
  • Javier Portillo

    Assistant Professor of Economics, Birmingham-Southern College
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Large-scale developments often require developers to aggregate multiple parcels of land to proceed with construction; this process is known as land assembly. Frequently, developers fail to assemble land due to a key landowner, or holdout, who seeks to extract monopoly rents. While, the holdout problem has been studied extensively in the literature, an additional and equally important source of friction involves positive post-development externalities. These externalities manifest when a developer successfully aggregates land, but only affect the price of unsold, neighboring properties. Using a series of laboratory experiments, we show that post-development externalities reduce aggregation rates relative to a baseline with no externality, when buyers cannot capitalize the externality into their offers. Externalities also reduce the expected surplus for developers and increase bargaining times. When the transaction surplus is sufficient to cover the externality, landowners capitalize roughly 65% of the externality and aggregation rates improve to baseline levels.