Breaking Ground: Can Refund Bonuses Solve the Holdout Problem?

In a recent study published in the Journal of Urban Economics, researchers Cason and Zubrickas have demonstrated that refund bonuses can effectively address the holdout problem. The holdout problem arises when achieving complementarity among independently controlled assets requires their combined value to surpass the sum of individual parts.

To tackle this issue, the researchers introduced a new contingent contract mechanism: a refund bonus paid to asset owners who agree to participate, such as selling their asset, if the project success threshold is not met.

The researchers conducted an experiment to test the effectiveness of this refund bonus mechanism. In the experiment, asset owners had the option to accept an offer to sell their asset in each round, with the requirement that multiple owners needed to accept for the contingent sale to proceed. Holdout owners, who did not sell their assets, could potentially earn more by not participating, creating a strategic situation akin to the volunteer’s dilemma.

The findings from the experiment indicated that the introduction of the refund bonus significantly improved the situation. Sales increased by 35 percent by the second half of the experimental sessions, and the success rate of projects meeting the threshold nearly doubled compared to when no bonus was offered. This suggests that refund bonuses can enhance cooperation and efficiency in situations where the combined value of assets exceeds their individual worth.