Another key aspect of the auction methodology is setting the reserve price. McAfee et al. (2002) generate a bidding model to illustrate how to optimize auction yields based on a reserve price. They find that, based on the model, the reserve price should be “at least as large as, and generally strictly larger than, the average value (to the seller) of good that fail to meet the reserve”. While this empirical study corroborates intuitive notions of what the reserve should be, it does not offer practical advice to local finance managers. A review of the literature suggests that reserve prices are typically set slightly below the true market value. In Singapore’s sealed-bid auctions, the reserve is set at 85 percent of the Chief Valuer’s assessed market value (Ooi et al. 2005: 13). Kaganova (2010) offers a “rule of thumb” of a starting or reserve price set to 80 percent of market value. While there are theoretical and practical examples of informed reserve price setting, countries who have turned to auctions in order to better grasp prices will struggle with setting a reserve price that relies on market value. Frequent auctions, however, provide dynamic data on revealed prices which allows for developing land pricing models based on historical prices.

When it comes to the acquisition of private land, the use of eminent domain sparks questions around what can be determined to be just compensation. “Just compensation,” a term used in the United States Constitution, holds no explicit meaning, but suggests that it reflects commonly understood values. Shapiro and Pincus (2008) propose a “Strong Pareto” auction for land assembly under eminent domain. In this model, each landowner sets her own reserve, and the total reserve amount aggregated into this assemblage and divided by the number of shares each landowner holds. Shapiro and Pincus’ model offers a view of the interaction between reserve setting and bidding on assembled plots. The resulting efficiency and fairness benefits demonstrate welfare maximization and provide a case for public assemblage of land as a form of public goods creation.

Actual land auction data is not widely available, but a number of countries use land parcels sales through auction as a standard component of their land management practice. However, recent large transactions provide examples of the revenue potential of land auctions. However, it is important to keep in mind as one looks at these numbers, that the land sales revenue is a onetime collection. Even if the numbers at first seem high, they do not provide a continue revenue stream as property tax receipts would. Three notable land auctions are documented by Peterson (2009) and Peterson and Kaganova (2010).

- 1) Cairo, Egypt (May 2007): auction of 3,100 hectares of desert land for a new town, generating US$3.12 billion.

- Land auctions are a key tool of Egypt’s Public Asset Management Initiative and New Town development; they reflect part of a long-term policy agenda

- Land auctions seen as a way to enlarge private sector involvement in financing infrastructure and new development

- Private buyers of land are also responsible for installing necessary infrastructure on those sites (Peterson 2009)

- 2) Mumbai, India (January 2006 and November 2007): auction of 13 hectares of land in the centrally located, new financial center—Bandra-Kurla Complex, generating US$1.2

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