Buying up the Block: An Experimental Investigation of Capturing Economic Rents Through Sequential Negotiations

This article analyzes an economic experiment designed to measure the effect of “legal technology” on the economic efficiency of Coasian bargaining. In the experiment, the agreement of many agents (called “landowners”) to transfer their property rights to a single agent (called “the developer”) generates an economic surplus. In this setting, we show that a very primitive legal technology sequential cash purchase (SC-P) is a strong implementation of a unique efficient bargaining outcome as a subgame perfect equilibrium. However, when deployed in the laboratory, SC-P results in an average loss of 60% of the economic surplus through inefficient negotiation failure. Deploying a more behaviorally robust but also more legally complex technology, a tender and conditional offer (TC-O) mechanism, halved the surplus loss and supported significant developer payoffs. These results suggest that, even absent asymmetric information, moral hazard, and transactions costs, complex legal technologies can increase bargaining efficiency. (JEL K11, D02, C70)