Competition for Land and Economies of Density

Development projects often involve assembly land from a variety of different owners to form a large continguous plot. Such aggregation makes it possible to operate the project on a large scale, which can confer efficiency benefits. However, the aggregation process can simultaneously raise issues. On the one hand, small landowners may try hold-out strategies, with the aim of extracting the full surplus of the project, and the potential for holdouts may discourage initiation of the project in the first place. On the other hand, small landowners may themselves be in a weak bargaining position, with no alternative to take-it-or-leave-it offers from the large operator running the project. To address these issues in the oil industry, many states have adopted a forced-pooling policy. With this policy, a regulator defines a spacing unit that aggregates the land interests of potentially many owners, and orders the revenues and costs of the operation to be shared proportionate to the land holdings on the spacing unit. Forced pooling obviously shuts down the ability of a small landowner to play a hold-out strategy. But, the policy also can protect the interests of the small landowner. Rather than accept a take-it-or-leave-it offer from the large firm running the oil operation,