Forced Cooperation vs. Competitive Holdouts: Efficient land use policies in the oil and natural gas industry

Eminent domain policies are widely applied in many different settings, yet there is little empirical evidence measuring the effects of these policies on economic outcomes. The welfare effects of these policies are ambiguous whereby the ability to bypass costly holdout property rights owners may be beneficial, the revocation of exclusion rights generally leads to lower prices for owners. In this paper, I use variation in state-level policies to quantify some of the costs and benefits of eminent domain policies in the context of oil and natural gas extraction. These policies are designed to balance the tension between preserving private property ownership and allowing publicly beneficial projects to proceed. I find that production efficiency gains are greatest when targeted to the scale of economic use, a gain of approximately $2,591 per acre, and marginal production losses from policies that do not strictly regulate firms’ drilling behavior. Further, I find evidence of contracting losses for private property owners that negotiate late, resulting in a 30% decrease in contract concessions benefiting them. Finally, the study documents the industry changes in contracting costs more broadly.