My latest paper, with Cason and Zubrickas, has just been published in the Journal of Urban Economics. We show that refund bonuses can indeed improve the holdout problem.

The holdout problem is a pervasive challenge in situations that require the assembly of independently controlled assets, where, because of complementarity, the combined whole is worth more than the sum of its parts. In practice, that makes coordination difficult when one owner can block a project that depends on multiple participants. One way to address holdout problems is through contingent contracts, in which agreements depend on reaching a predetermined threshold.

This paper reports an experiment testing a new refund bonus contingent mechanism. Under this mechanism, asset owners who agree to participate — for example, by agreeing to sell their asset — receive a bonus payment if the required threshold for project success is not met. The refund bonus eliminates failure equilibria and improves the frequency of successfully reaching the threshold in the symmetric mixed-strategy equilibrium.

In the experiment, individual asset holders decide in each round whether to accept an offer to sell. Multiple owners must accept for the contingent sale to occur, and holdout owners who do not sell can earn more, so the game has the strategic incentives of a volunteer’s dilemma. The results show that the bonus mechanism increases agreements to sell, the frequency of successful projects, and overall efficiency. By the second half of the experimental sessions, the total number of sales is 35 percent higher, and the threshold is met nearly twice as often with the bonus than without.

I also cover this paper in my Refund Bonus (aka Dominant Assurance Contract) Explainer.