Reply To: Holdout Problem


Entrepreneurs solve the hold out problem with special terms of contracts. For example, an entrepreneur wanting to buy adjacent land parcels owned by several different land owners could offer each one a contract to buy his land contingent on the entrepreneur’s purchase of all the other parcels from other land owners or he could offer each landowner an option contract to buy his parcel at a future date (when the entrepreneur has made option contracts with the other landowners) at a price agreed upon today and then exercise the options only when all the landowners agree to sell.

Here is a scholarly article on the background behind the contract solution to such alleged externalities (the hold up problem is discussed on p. 467f):