Pluralism and Regulatory Failure: When Should Takings Trigger Compensation?

Abstract

Abstract The paper evaluates the desirability of compensation for regulatory takings. To do so,we describe a public choice model in which regulators' decisions are influenced by competingpolitical interests. We consider how the political incentives of landowners, environmentalists,and taxpayers are affected by alternative compensation rules and in turn describe the regulatorydecisions made in such a pluralistic political environment. Modeling the regulator's incentivesin this way leads to the conclusion that compensation should not be paid unless environ-mentalists and property owners have unequal influence politically. Moreover, the model hasseveral counter-intuitive implications when political influence is not balanced. For instance, ifenvironmentalists are disenfranchised they should support compensation, since it reducesproperty owner opposition to regulation. In contrast, if environmentalists wield dispropor-tionate influence, penalizing rather than compensating landowners can induce more efficientregulation by stimulating landowner opposition. The analysis emphasizes the deadweightsocial costs of compensation and the desirability of compensation rules conditioned on bothdiminished land value and irreversible landowner investments.Key Words: regulatory takings, compensation, political economyJEL Classification Numbers: K11, D72, L51