Describe the holdout problem with emphasis on how it might lead to resource being allocated inefficiently. Give three private ways to possibly overcome the holdout problem

Question

What will be an ideal response?

Answer 1

The holdout problem arises when unanimous agreement is required for a collective action. The holdout problem can prevent Pareto superior moves from occurring because the holdout prevents actions that would make everyone better off in an attempt to improve their personal take. One way that the holdout problem can be overcome in certain situations is through contingent contracts where certain contracts vest only if everyone agrees. A second way is to hide ones intention to minimize the holdout problem. For example, the Disney corporation successfully disguised what it was doing when it purchased land on which to build Disneyworld. A final way to overcome the holdout problem is to substitute to a similar project not suffering from the holdout problem, such as building a shopping center on farmland on an urban fringe instead of downtown.