Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Land Auctions Leave Billions on the Table
Transcript
- Lucas: Let me start with a number: twelve billion dollars. That is roughly how much money US state and local governments leave on the table every year when they sell public land. Luna: Twelve billion? That is not rounding error territory. Where does that estimate come from? Lucas: A 2024 paper from the Federal Reserve Bank of Philadelphia. They looked at thousands of land sales by municipalities and found that parcels sold via sealed-bid auctions — the standard method — went for about 15 percent below independent appraisals on average. Extrapolate that across all public land sales and you get to twelve billion. Luna: So the government is systematically under-selling its own assets. That seems like a basic fiduciary failure. Lucas: That is exactly the word for it. And it is not just a US problem. Take the UK. In 2023, Homes England — that is the government's housing and regeneration agency — auctioned a prime development site in the London borough of Camden. Independent valuation: 85 million pounds. Winning bid: 50 million pounds. That is a 35 million pound discount. Luna: Forty-one percent below valuation. How do you justify that as a public official? Lucas: The official justification is always the same: we need to move the asset quickly to stimulate development and meet housing targets. Speed over value. But the problem is that speed is not actually an inherent feature of sealed-bid auctions. It is a design choice. And the design is stacked against the seller. Luna: Walk me through the mechanics. Why does sealed-bid specifically produce low prices? Lucas: It is a classic winner's curse problem. In a sealed-bid auction, bidders submit one offer without knowing what anyone else is offering. If you are a developer, you worry that if you bid the true value and win, you probably overpaid. So you shade your bid down. Everyone does. The winner is the person who shaded the least — but still below market. Luna: Right, it is the same logic that makes oil lease auctions so tricky. The winning bidder is the most optimistic — or the biggest risk-taker — not necessarily the one who values it most. Lucas: Exactly. And governments compound this by not setting a public reserve price that is binding. Often the reserve is set low — sometimes as low as 50 percent of appraised value — just to ensure a sale. So bidders know the floor is soft. They bid accordingly. Luna: What would a better system look like? I know some Canadian provinces use ascending clock auctions for timber rights. Does that translate to land? Lucas: It translates perfectly. In an ascending clock auction, the price starts low and rises in rounds. Bidders drop out when the price exceeds their valuation. The last bidder standing pays the price at which the second-to-last dropped out. That reveals true demand and eliminates the winner's curse. British Columbia has used this for crown land sales since the early 2000s and consistently gets prices within 5 percent of appraisal. Luna: So why does every government not switch tomorrow? Is it political cover? If a sealed-bid auction produces a low price, officials can say 'the market spoke.' With a clock auction, the price is transparently tied to demand — and if it is low, you cannot hide. Lucas: That is part of it. There is also the administrative friction of running a multi-round auction. It takes more time, more staff, more software. But the return on that investment is enormous. If we could recapture even half of that twelve billion dollars a year, that is six billion for schools, roads, or paying down debt. Luna: And the funny thing is, some governments already know this. The US Department of the Interior uses ascending auctions for offshore wind leases and gets billions above reserve. It is the same principle. Lucas: Right. The technology and the expertise exist. It is a matter of political will and procurement reform. And that is the kind of boring-sounding fix that could actually move the needle on public budgets without raising taxes or cutting services. Luna: You know, if today was actually useful to you — if thinking about auction design as a budget tool made something click — the way these episodes stay ad-free is listener support. It is buy me a coffee dot com slash fexingo. That is it. No tier, no perks, just knowing the show keeps going. Lucas: Yeah, and we mean it. The whole reason we can drill into something like land auction mechanics without a commercial break is that listeners who find value chip in. So if you got something out of this, that link is buy me a coffee dot com slash fexingo. And now back to the structural fix. Lucas: The obvious objection to switching to clock auctions is that it might slow down development. If a developer has to wait six months for a multi-round auction instead of two months for a sealed-bid, that could delay housing starts. Fair point. Luna: But is that delay real or just perceived? Because the sealed-bid auction itself often takes months to prepare — appraisals, legal reviews, marketing. The actual bidding day is just one day. Lucas: You are right. The bottleneck is not the bidding format — it is the pre-auction due diligence. A clock auction can be run in a single day if you have the right platform. The time from listing to closing is essentially the same. And the extra revenue can be used to pre-fund infrastructure that speeds up development anyway. Luna: So it is a false trade-off. You do not have to choose between speed and value. You can have both if you design the process correctly. Lucas: Exactly. And there are real-world examples. Australia's New South Wales government transitioned from sealed-bid to a hybrid clock auction for industrial land in 2021. In the first year, proceeds increased by 22 percent. Developers did not walk away. They adapted because the process was more transparent. Luna: What about smaller governments that cannot afford a sophisticated auction platform? Is there a low-tech alternative? Lucas: Yes — a simple English auction. Open outcry, in a room. That eliminates the winner's curse because bidders see each other's interest. It is not as efficient as a clock auction for complex parcels, but it is a huge improvement over sealed-bid. A 2018 study of municipal land sales in Ohio found that English auctions fetched 18 percent more than sealed-bid auctions for comparable parcels. And you just need a gavel. Luna: So the fix is cheap. That makes the continued use of sealed-bid auctions even more puzzling. Is it inertia? Or is there a constituency that benefits from low prices? Lucas: That is the uncomfortable question. When land sells below market, the primary beneficiaries are the winning developers and their investors. Those developers are often well-connected. They donate to campaigns. They lobby. A low-price auction is effectively a subsidy — but an opaque one that never appears in a budget line item. Luna: And that subsidy comes out of taxpayer pockets. Twelve billion dollars a year in the US alone. It is the kind of hidden fiscal policy that never gets debated. Lucas: Right. And that is why we are spending an episode on it. If you care about government efficiency, this is a lever that costs almost nothing to pull. Auction design reform is not glamorous — but it might be one of the highest-return policy changes available at the state and local level. Luna: So where does the pressure come from? Transparency groups? Auditors? Or does it take a fiscal crisis? Lucas: Historically, it has taken a crisis. Detroit started using ascending auctions for city-owned lots after its bankruptcy, because the emergency manager had cover to change old practices. But more recently, we have seen proactive pushes. Colorado passed a law in 2022 requiring all state land sales to use either a public auction or a competitive sealed-bid process with a public reserve price. That is a step forward, but not enough. Luna: It still allows sealed-bid. Just with a higher reserve. The real reform is to mandate an open ascending format. Lucas: Exactly. And I think we will see more of that as budget pressures mount. Property tax revenues are slowing in many states. Infrastructure needs are growing. Leaving billions on the auction table is going to look less and less defensible. Luna: Final question for you: if a listener is a local government official or a concerned citizen, what is the one concrete thing they should push for? Lucas: Ask for a simple audit. Look at the last ten land sales in your city. Compare the sale price to the independent appraisal. If the average gap is more than 10 percent, that is your evidence. Then propose a pilot — three parcels sold via ascending auction. Measure the result. The data will speak for itself. Luna: I like that. It is testable. And it is not about ideology — it is about math. Lucas: That is the whole show's philosophy, really. Fiscal policy is just math with consequences. And when the math says you are leaving twelve billion dollars on the table, you ought to fix it.