Hacienda Luisita and the wisdom of King Solomon

Land reform has become an exercise of “fair division,” a state of affairs exemplified when two children are given a cake to share, and the parent has to decide what the fair portions are.

The academic solution is well settled.  Let one child divide the cake, and let the other choose which part he wants.  These solutions can be called Solomonic bargains because of the Biblical story about King Solomon and the baby that was being contested by two claimant “mothers.”

In the case of Hacienda Luisita, the issue is similar but it is not about quantity but price.  How much is the “reformable” land on the books of HLI fairly worth?  For the sake of discussion only, let us say that the Cojuangco family publicly puts a value of about P4B on the reformable land, and P8B on the other assets.  These rough figures are based on about 4,400 hectares of reformable land valued at P100 per sq. m.  This also seems consistent with their reported view that the farmer’s share in HLI is 33%.  But this is not the end of the story.  The family may in fact believe that the correct value of the reformable land is P8B or more.

What about the tenant farmers?  Perhaps they actually think like the Cojuangco family and believe the land is worth more than P4B.  Let us say they think it is worth P12B, if the government will help them buy the land.  Let us say that the government agrees with this P12B valuation.  It is also possible that the tenants want P20B.  If this is unrealistic, the government will have to step in and tell the farmer that it can help them acquire the land only up to the P12B value.

Conventional economics says that a price somewhere between P8B and P12B is possibly within the realm of voluntary agreement.

A Solomonic bargain can now be set in place.  Let the representatives of the disputing parties meet and write down on paper the valuation they consider fair and reasonable.  They each put them in envelopes and seal them.  They only need to put down one number – the value to be put on the reformable land.  However, it is an essential part of the Solomonic bargain that that one number is also the value that that party puts on the other part of HLI.

The Solomonic bargain can then be used to discover which price is fair.

How does it work?  Illustratively, it will work in the following steps.

First, let an independent entity (perhaps DAR) choose at random which envelope to open.  That envelope will determine the price of the reformable land.  Significantly, it will also determine the fair value of the other assets of HLI.  As noted above, the parties must first agree, as a precondition to the bargain, that the reformable land and the other assets of HLI are equal in value.

At the second stage, the party whose envelope was not opened, can use that price either to buy the reformable land or “sell” the other part of HLI to the other.

For example, if the Cojuangcos say P4B, the farmers (aided by government) can “buy” the land at that price.  If the Cojuangcos say P20B, the Cojuangcos can be forced by government to “buy” the other part of HLI at that price from the tenant farmers.  This is fair because the Cojuangcos can presumably sell the reformable land to some other entity at P20B.  (This is the logical counter-part of the “you divide-I choose” solution in fair division.)

On the other hand, if the envelope opened was that from the tenant farmers, and they give a figure of P8B to P12B, the Cojuangcos can buy the land from the farmers at that price.  If the farmers give a figure of P20B, the Cojuangcos can force the tenant farmers (and the government) to buy the reformable land at that price.  This is also fair because the government must have agreed with the tenants that the price of P20B is reasonable.

Thus, in the second step, whichever envelope is opened, that will set the “true cost” of land reform, in the sense of how much the government’s financial resources will need to be put on the table to effect the land reform.  That cost is in fact borne by a third entity, the ordinary taxpayer, since it is public resources that are used to finance land reform.  It is in the interest of the general public (i.e., the taxpayer) to set an upper limit to how much the tenant farmers will value the land, or to how much the Cojuangco family will value the other part of HLI.  This seems sensible because the history of Hacienda Luisita is such that its original seed money came in large part from government funds or loans.

What is the usefulness of the Solomonic bargain?  It makes both parties behave when real money is involved, whereas they may want to simply game the land reform if they can take advantage of taxpayer monies.  At present, the Cojuangco family appears to want a low price because it determines the “cash out” part of a stock distribution scheme, whereas they will want a higher but fair price if the government will acquire the land from them.  If they seek too high a price, it is the government on behalf of the general public who will have to say that there is a limit to that price.  A similar limitation as an outcome could result from a Supreme Court decision on the value of just compensation in this particular case, something that can take more time, perhaps years, to work out.

Another benefit of the Solomonic bargain is that if it works well, it can be applied to similar other pending cases of land reform.

It would come as no surprise that the valuation in the two envelopes will likely be quite close to each other.  In the illustrative discussion above, it will probably be near P10B, somewhere between P8B and P12B.

What will it take to make the scheme work?  I submit that it requires good faith, political will, and a special rule.  That special rule is that once the scheme has been implemented, the “reformed” land can then be transferred freely as though they were no longer covered by the land reform law.  This may require special legislation, but that is perhaps the least difficult part of the scheme.

Note:  I discussed the concepts of Solomonic bargaining  in more depth in 2003.

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2 thoughts on “Hacienda Luisita and the wisdom of King Solomon

  1. “As noted above, the parties must first agree, as a precondition to the bargain, that the reformable land and the other assets of HLI are equal in value.”

    ah, but they are not. there is no reason why they are equal in value in reality. the other assets may in fact be more valuable than the land, or less.

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    1. It could go either way. Solita Monsod, for example, thinks the reformable land is more valuable than the other assets. But, just to get something done, it is an act of good will on the part of both sides to agree on an equal-value presumption as a precondition. That this may not be factual is perhaps not all that relevant. I can also imagine that they can first agree on a relative valuation or sharing rule (if not 50-50, then any other ratio), and the Solomonic bargain can be modified accordingly.

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