A mechanism for assembling properties with diverse ownership : application to the anti - commons problem

Assembling individual pieces of land into large parcels for public purposes often involves the use of eminent domain, including when the assembled land is passed into private hands. Questions of equity and efficiency arise. Firstly, the US and other Constitutions require that owners of compulsorily-acquired property receive ‘just’ compensation. As existing owners are likely to value their property higher than the market, a premium is justified: but how much? Secondly, the efficiency of a forced change in land-use of the assembly cannot be judged by the usual market tests. The efficiency question is more complicated when the conversion and new use of the land generates significant local spillovers. We propose a mechanism—the ‘Strong Pareto’ or SP auction—which ensures that affected landowners are fairly compensated and, simultaneously, that only efficient project are undertaken. Crucially, the auction design elicits truthful revelation of individual property owners’ reservation prices. Comparison is made with ‘Groves mechanisms’. The SP auction could be used in ‘public-private partnerships’ for urban renewal, toll roads, ports and port-side facilities, in which eminent domain is used, and the private partner is responsible for building, owning and operating, and is motivated by profit. JEL codes: H23, K11, D44, D71