Bidders Premium on Government Land Auction: Floor Price vs. Winning price

Abstract

The land management and governance system is the underlying cause for capitalizing the opportunity or facing the challenge of rapid urbanization. The urban land lease policy of Ethiopia, least urbanized but fast urbanizing country, is considered the most influential policy that determines the investment environment in the cities. It lays the foundation for acquiring ‘land use right’ through auction or negotiation. This paper quantitatively examines its implementation using data obtained from the urban land auction market in the country’s capital. The study found a very high divergence between the auction guide-prices (set by the government) and the sale prices (offered by land developers, investors), where the latter is significantly higher than the former. Besides, the variation is found to be significantly explained by a number of factors including floor price, plot size, plot use type, plot grade, plot location, and time of the auction. The study found that the urban land market is not majorly driven by economic rational. The land market system is not only highly exposed to speculations but also DRAFT its urban land acquisition is majorly a secondary market, with no policy-ground. As a result, the market is characterized by high inefficiency and weak institutional capacity. The study also identifies feasible options that consider the unique features of Ethiopian cities for efficient and effective urban land management so that they can capitalize on the opportunities from the rapid urbanization process in the country.