We all know one of THOSE people. The aunt who wears the same hat every day, even if it is threadbare. The brother who is still holding a grudge about the time you took the last corn muffin at Thanksgiving. Sometimes we are the ones who keep boxes of the past piled up around our ears, unwilling to let go of the 3rd grade report card when we got an "A" in art class. Whoever they are, they impede progress, they get in the way, they slow everything down. Can this kind of mentality be the caues of a market failure in land-use?
Thomas J. Miceli and C.F. Sirmans wrote an article in the Journal of Housing Economics in 2007 where they argue that the "hold-out" problem is a contributor to urban sprawl. At this point, it would be beneficial to mention that while the authors seem to believe that sprawl leads to many other negative social and economic problems, they are using a definition of sprawl for the purposes of their paper that involves lower density development on the outskirts of a city that is somehow less effecient thanit would be to develop further in.
Miceli and Sirmans argue that when developers need to purchase a parcel of land that is currently in the hands of several different and dispersed users, the costs increase because one or more of the current owners could try to "hold-out". Essentially, for either sentimental reasons or to try to steal profit/surplus from the developer, some of the current owners will hold themselves out from selling when the rest of the group does. These increased costs, and the risk of losing the entire development if even one current owner refuses to sell at any price, push developers of larger projects to bid for parcels at the outskirts of a city. (The typical monocentric city model indicates that lot sizes grow smaller toward the center of the city because of increases in price)
Because of these stubborn codgers holding out, we find ourselves forced into a position of sprawl. Developers must move outward if they want to build for a profit, because the true costs are not captured when there is a "hold-out". Now, is this a market failure? I believe it is more likely not a market failure, but an unfortunate risk of doing business. If we believe that the land will go to it's most highly valued use, it is clear that the current owner, however much a stick in the mud, values the land more highly than the developer is willing to pay. Just because you neglect to factor for a risk of doing business, it is not an automatic failure of the market.