Land Assembly without Eminent Domain: Laboratory Experiments of Two Tax Mechanisms

Abstract

We use laboratory experiments to test the ability of two tax mechanisms to discourage seller holdout and facilitate land assembly. In one mechanism (“revealed assessment”), if a seller rejects a developer’s offer, then the property value is reassessed to be equal to the rejected offer and the taxes increase. In the second mechanism (“declared assessment”), a seller must declare a price at which he or she is willing to sell the property. The incentive to overstate the value is mitigated by using the declared price to assess a property tax. The incentive to understate the value is mitigated by allowing developers to buy the property at the declared price. We find that revealed assessment discourages the magnitude of seller holdout but not its frequency. Declared assessment has no effect on the magnitude of seller holdout but increases its frequency. Nevertheless, both tax mechanisms increase the rate of successful land assembly by more than 50 percent. Revealed assessment increases the gains from trade by 22.1 percent relative to the control treatment, but the difference is not statistically significant. Declared assessment increases the gains from trade by 124 percent, and the difference is highly statistically significant.

Keywords: land assembly, eminent domain, taxation, urban economics, law and economics, experimental economics

JEL Classification: D9, H2, H7, K4, R0