How do you secure the corridor?

Securing the corridor is not just a military problem.

Alex Tabarrok writes blithely in Toll Collect:

I see toll roads, most privately operated and some privately owned, as the road of the future.  Road pricing can not only reduce congestion it can also help with accident externalities.

The libertarians at Samizdata and Transport Blog are also dreamily infatuated with this model; but the one flaw I see -- and no one seems to be able to answer it except by waving their hands wildly and talking about "mutual advantage" -- is how do you secure the corridor without government's power of eminent domain?  Talk all you like about negotiating with private property owners; the transaction costs involved cannot be surmounted; you need the government's heavy hand of condemnation to secure a road in and between metro areas -- which is of course exactly where you'd want to put the new roads, if you could garner the political support to put very many new roads anywhere.

I might like to believe otherwise but I am a realist.

And if you are merely talking about private financing of roads already designed and with a route secured by the government, then I don't think that's much of a big deal.

(Note:  This post doesn't reach the issue of pricing road use, which I think is another one of those attractive ideas with superficial appeal and which also faces insurmountable practical, legal and political problems.)

UPDATE: The very interesting commments buttress my point. In order to avoid condemnation, eminent domain, you have to come up with a Rube Goldberg set of assumptions about how to create a rather vast transport corridor through the negotiation (along with feints and counterfeints) of rights and options. The suggestions, while having some theoetical appeal, seem to me to ignore the difficulties of negotiating with thousands of owners as well as the practical limitations on where new corridors could/should go.

I suggest that anyone familiar with the very reality-based world of real estate will see what I mean.

Comments

[Glen Raphael]

Secure options on a wider and more varied swath than you actually need to build the road. Once you have enough options that some subset of them adds up to a decent road, exercise the options you need and build the road. Let the options you don't need expire.

Make the options profitable enough that people in the path wouldn't want to miss out on their being exercised. For instance, if you told me you were considering the possibility of buying my house for twice its current value, I'd happily sell you an option to do that for a dollar. Okay, maybe $50 - I'd need some compensation for the effort involved in reading the contract. The point is it shouldn't cost you much to make the offer, if the offer is reasonable.

You only need eminent domain if you want to force people to move at a price that is not reasonable compensation for their trouble and the value they add to your project.

[David Sucher]

Glen,
Several immddiate reactions:

Options are not free of either direct dollar or transaction cost.

Moreover, if you "secure" (i.e. buy with cash) more than you need you raise even more political issues

1. more hold-outs who simply don't want to sell or
2. more people who are NOT within the corridor but who will be adversly impacted and who will put up a legal challenge.

It's tough and in the big picture it's why we, as a society, have settled on eminent domain as a necessary evil.

[Murph]

I think the biggest problem with acquiring property is the holdout problem. While Glen's approach might avoid that for owners of 40'x120' city lots, it doesn't work for people who own large swaths of land. Particularly large swaths running perpendicular to your intended route. Particularly, say, owners of other roads. "Yeah. Sure we'll let you intersect our road. That'll be $astronomical." Competing road companies? Yow.

On the other hand, as an (evil! horrible! terrible! tyrannical! oppressive!) urban planning student, I'd advocate for the position that maintaining/improving/rebuilding existing infrastructure is a far bigger problem than building new ones, and one that could be done without eminent domain.

[Glen Raphael]

David:

The reason you buy more than you need is specifically to combat holdouts. It's an insurance policy that will drive down the prospective value of any particular property. Any single holdout has no power to stop the whole project; the worst he can do is force you to route around him. And if you're buying options, the holdout loses a lot of money if you don't then exercise them. Sure, an option has costs, but those costs should be a small fraction of the cost of purchasing and building the road. There are many possible routes from point A to point B. You pick the route on which you can negotiate the best deal. If it is impossible to find a price at which the people along the way are willing to sell, it's quite possible that the road isn't worth building along that route. (Or perhaps at all. We shouldn't assume in advance that we know it is.)

The reason people want eminent domain is that they want to force those in the way to move at near or below the true market value of their property. And THAT is why there are holdouts in real-life projects. If you were offering two or three times the value of the property, holdouts would be few and far between. Options reduce the potential for gaming the system. Offer people a one-time fixed fee for the right to buy at a pre-negotiated price. If the negotiated price gets too high, you don't exercise. The risk of that happening reduces the incentive to game the system.

(1) The cost of "finding additional holdouts" is essentially nil; either you never buy their option or you never exercise it because it's too expensive. Either way, it doesn't cost you anything more than does buying options on additional non-holdouts.

(2) On what grounds would people who aren't within the corridor have the right to sue? Especially when you haven't even bought the land yet?

Murph: If you ran a private road, wouldn't you want other people funnelling customers to you and making your roads more valuable to your own customers? Talk about "network effects"...

[Murph]

Glen, I certainly would. But that doesn't mean I wouldn't want to milk the new access point for all it was worth. Just because it'll enable me to make more money from my customers doesn't mean I don't *also* want to make money from the other roadbuilders!

[Glen Raphael]

Murph: You'd probably want to reach agreement with any major crossroads first, before you spend too much money on the smaller options. You'd reach agreement in the same way - offer to buy an option to interconnect for significantly more than what it would cost them to let you do it. I'd expect this to be easier than dealing with individual plot-owners because there are fewer players involved and it's such an obvious win-win that standardized agreement terms would evolve.

There's a pretty big logical leap from saying "this sort of agreement would sometimes be difficult to reach in practice" to concluding "therefore, we need the government to order people at gunpoint to do what we want." Some things should be difficult to reach agreement on. Whether people are forced to relocate their homes and businesses when they weren't inclined to do so of their own free will is one of those things.

Eminent domain has benefits and costs. One cost is that it short-circuits the process by which one could rationally discover whether a project makes sense. If you start out with the assumption that you somehow already know in advance that a project is worthwhile despite all the homes you'll have to wreck to make it, then holdouts look like a bad thing. But that's a dangerous assumption. Sometimes it'll be wrong. Strategic holdouts are the occasional exception, but the rule is a large group of people who like their house or business just the way it is and correspondingly need to be offered more than the "market value" as an incentive to move out on a timeframe that is convenient to you rather than convenient to them. Their inconvenience is a real cost, not something they are pretending about for bargaining purposes. Eminent domain lets us ignore that cost, pretend it doesn't exist, and order them to do what we want. It offers convenience at the cost of justice and great potential for abuse.

[TM Lutas]

Why would the option to buy have to have a time limit? Why couldn't road building rights be traded further on in a secondary market? Why not reverse the contract and provide holdouts with the ability to pay the municipality from immunity from eminent domain for various reasons?

What I'm getting at is that there are probably many ways to skin this cat and it makes sense to periodically examine whether trading industry has come up with instruments that might work out just fine to eliminate the need for eminent domain. If they have not, fine. We'll hold our nose and go with what we've got. If they have something that could work at least as well on net, ditch eminent domain because of the inherent problems of politicizing land transfer.

[asiequana]

Why would a private toll road be built without the government using eminent domain? This is how a private toll road works. Government decides a road needs to be built. They offer a concession to several private companies to build, maintain and operate for a specified period of time. Companies bid on the project, government selects one, government uses eminent domain and keeps ownership of the right of way. Private company then builds, maintains and operates road for the concession period. Payments to the private company can be strutured to be either direct periodic payment to the private company by government or through tolls. At the end of the concession period control reverts to the government.

Privately funded infrastructure is a global trend and already works well in many other countries. It will inevitably happen here given limited government resources available to fund these projects going forward.

[TM Lutas]

asiequana - The reason not to use eminent domain is that there might be better uses for the land, the transportation project might be a white elephant, and you want to learn that early, not late in the process of building. The fewer pricing signals you get, the more likely it is that you're going to make a mistake and create a road that simply should not have been built.

Eminent domain is a pretty powerful distortion of normal pricing signals so if you can get rid of it, you should. The real question is whether we've figured out how to get rid of it while improving net final outcomes. I believe that if you were given a chance at closing to reduce your mortgage by signing a "no holdout/market sale" contract, that would provide infrastructure builders the equivalent of eminent domain in a private framework, identify holdouts early, allow for alternate route planning cheaply/early, and avoid all the political costs of invoking eminent domain which also costs a pretty penny as well.

It would be a very different system that would provide similar gross physical results. Infrastructure like roads would be built or sidewalks would be added as rural properties turned into suburbia but it would also provide more pricing information to help in infrastructure planning. That's really the end point of such excursions into speculative substitution of market for law, increasing the net benefits of the process.

[David Sucher]

TM Lutas remarks:

"I believe that if you were given a chance at closing to reduce your mortgage by signing a "no holdout/market sale" contract, that would provide infrastructure builders the equivalent of eminent domain in a private framework..."

TM, you already have the agreement. That is eminent domain. The law says that you must sell and that the condemning agency must give you a fair market value. So I don't understand what the homeowner gets/gives up in your case? An agreement not to contest the price? Give me a break. No one is foolish enough to do that. You must to have the threat of going to court to make the public agency offer a fair price at the outset; otherwise they will take advantage of poperty owners to a degree which would shock even libertarians.

I'd suggest that this is yet another Rube Goldberg device. Just looking on the "buy" side. Do you understand that in Seattle there are probably a hundred different state, federal and local agencies which could claim eminent domain over, for instance, my house? To come up with a figure to offer me in the system you propose -- long before any one of them really contemplates buying my house -- each of them would have to negotiate a joint agreement etc etc. The transaction costs are unbelievable; that's why such a thing doesn't happen.

Then, what would that figure be? i.e. the one given to the buyer. I cannot imagine imagine even remotely giving up the right to contest the fair market valuation in court for less than, say, $50 thousand; and that might be low. The risk of a wipe-out is too high; would my lender agree to a "no contest" rule (assuming that I understand your drift) if I had a 90% Loan-to-Value? I don't think so because then they might get damaged.

Try again. :)

[Tim Hulsey]

otherwise they will take advantage of property owners to a degree which would shock even libertarians.

Shock, perhaps, but not surprise. Have you been reading about the new baseball stadium in Southeast D.C.? The city is proposing "eminent domain" legislation throughout the neighborhood, which will wipe out several developers' life savings. One reason people buy homes in the suburbs rather than the city, is that a government agency is less likely to steal their property.

[Glen Raphael]

TM Lutas:
The option to buy for a fixed price has to have a time limit because real estate values change over time as does the life situation of potential sellers. Currently my house is worth about $700k, so I'd gladly sell someone a six-month option to buy it for $2 million. But if the option were indefinite, selling it puts a cap on my appreciation potential. There's no way I'd sell an indefinite-length "right-to-buy" for a fixed price, and it's hard to imagine a formula that would tell you what non-fixed price I'd be willing to sell at five years from now.

But I agree with your general premise that if eminent domain didn't exist there are probably a lot of ways the market could solve the problem. The problem is that the institution of eminent domain constitutes an "attractive nuisance" that prevents anyone from having to do the difficult work of solving the problem legitimately when they can just use government-sanctioned force to flatten anybody who gets in the way.

David:
The simple statement of the free-market solution is "the person who wants to build the road buys the property he needs to do so from the people who own it now." That's at least as simple as "the government orders everyone to sell", and it's a whole lot friendlier.

You were the one who introduced the need for additional theoretical complexity by claiming there would be an infinite variety of "strategic holdouts", something I find pretty unlikely. If the road is really worth building, the builder can well afford to let most of the landowners in the way share in the profit by "holding out" for a property value well above the market rate, making them all happy.

If you start with the assumption the road must be built no matter what (and while paying no more than the market rate for the property), a few holdouts along a few key necessary routes could be a problem. But if you start with the assumption the road must be built if it makes economic sense, it goes away. Unlike the government, a private road-builder can credibly threaten to not build the road. That threat combined with the threat to build along a different route limits how much any one holdout can reasonably ask for. All that is required is that the purchaser is as good at game theory as are the sellers and is able to credibly stick to a commitment strategy.

Options are merely a way to reduce the cost of the negotiations.