Reference no: EM131101272
Subject: law and economics
Consider the model of land assembly (under the topic Eminent Domain). Specifically, assume that a buyer want to buy two contiguous properties owned by two different owners. You can assume that the properties are identical in all respects. There two possible scenarios for the bargaining between the buyer and the owners.
Scenario 1: The buyer negotiates with owners in sequence, i.e., with one owner at a time. If negotiation with the first owner is successful, the buyer negotiates with the second owner. Suppose, at each stage of negotiation, the owner can extract α fraction of the net total surplus/gains from the transaction at hand. There is no other hurdle to negotiations.
Scenario 2: The buyer negotiates with both the owners simultaneously. Sup- pose, the buyer refuses to deal with the owners individually and the owners believe such an assertion by the buyer. So, the only possible way to strike a deal is for the three of them to negotiate together. If negotiations are successful, the buyer will get two properties and the owners will get an acceptable price. Further, each party will get 1/3 fraction of the net total surplus/gains from the transaction. There is no other hurdle to negotiations.
(a) Compare the above scenarios in terms of the efficiency of the outcomes achieved. Use the Kaldor-Hick efficiency criterion.
(b) Compare the individual payoffs for the owners and the buyer, under the two bargaining scenarios. Which one is better for the Buyer?
(c) Under the assumptions stated above, can there be any hold up/out problem under the second scenario?
(d) For scenario 2, suppose the buyers assertion to engage only in the collective bargaining is not credible. Specifically, assume that one of the owners thinks that if she does not join the collective bargaining, the buyer will approach the owners in sequence as under Scenario 1. What would be the outcome now?
Prove your claims. You may want to analyze, by presenting each scenario as a game between the buyer and the owners.
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