Holdouts and Free Riders

HOLDING out and free riding are well-worn terms in the lexicon of law and economics. Unfortunately, the two expressions are often applied rather too loosely and interchangeably. Though they are members of the same family and have some resemblance, they are not identical twins. Each refers to an effort by the owner of a property right to appropriate quasi rents from an entrepreneur who launches a wealth-increasing project that touches on that property right. But, that said, holding out and free riding differ in their technical and legal antecedents, their behavioral imperatives, and their likely consequences. The circumstances that give rise to each phenomenon pervade the legal-economic environment. The purpose of this short article is to clarify and distinguish these terms. The following illustration will be the vehicle for revealing the distinct defining characteristics of free riders and holdouts. Let us suppose that Edith Entrepreneur owns a vacant lot situated on three-quarters of a block in a rundown residential section of town. Its value in its current use is $500,000. She intends to acquire the surrounding eight and one-quarter blocks, build a department store on the center block, and rehabilitate all the housing on the other eight blocks. Henry Holdout owns and operates a sanitarium on the remaining quarter block of the proposed department store. Its value in its current use is $400,000. Fred Rider is one of 800 identical owners of the 800 houses on the surrounding eight blocks. To simplify matters, assume each house has both a market value and subjective value to its current owner of $80,000. In order to develop my central theme, I will stylize my example so that Henry and Fred pose two distinctly different problems for Edith. They are to be archetypes of holdouts and free riders, respectively. Toward