Takings of Land by Self-Interested Governments Economic Analysis of Eminent Domain Law

Abstract

In this paper, we have modeled and examined effects of two salient features of the eminent domain law and its use. First, in most legal orders the compensation for taking of land property is less than full compensation according to the 'differential method' used under civil liability. Second, the government is not a perfect agent of the society. While making the takings decisions it has interests of its own which are not always the same as the social interests. Once these two features are factored in, several of the claims in the existing literature on eminent domain do not hold. Our findings question the 'fiscal illusion' based theory of the government's behavior. We have shown that when the government is self-seeking, full compensation ensures neither that the takings will be efficient nor that the project choice will be in the social interest. On top of that there will be excessive investments by property owners. This outcome cannot be improved even if the full compensation is supplemented with a legal provision of an action for restitution. However, the outcome is better if under-compensation is combined with the provision of restitution against unlawful takings. This combination delivers an outcome which is better than the outcome under full compensation on the following three counts: One, investment levels are more efficient; two, a taking happens only if it contributes to the social welfare; three, the project choice by the government is also better. Further, we have shown that fixed-compensation schemes including no-compensation, do not ensure efficient outcome even if the government is assumed to be benevolent. However, under-compensation can still deliver outcome more effcient than the full compensation. Finally, we have shown that if the taking is for a private investor, the full compensation to the affected parties can be a reasonable approach for efficient use of eminent domain.