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Friday, April 2, 2010

Bell and Parchomovsky on Takings Compensation

Abraham Bell (San Diego) and Gideon Parchomovsky (Penn) have posted The Hidden Function of Takings Compensation on SSRN.  Here's the abstract:

To date, scholars have justified the constitutional mandate to pay compensation for takings of property on the intuitively appealing grounds that fairness demands recompensing aggrieved owners; on the basis of a belief that government that fails to pay will suffer from “fiscal illusion” and take excessively; or due to the need to neutralize politically powerful property owners who would otherwise foil socially beneficial projects.

This Essay offers a new explanation of the role of takings compensation in ensuring good government. Inspired by public choice theory, we argue that takings compensation reduces the incentives for corruption by limiting corrupt politicians’ ability to profit from takings. Specifically, we show that mandating compensation reduces the funds self-serving politicians can extort from property owners. At the same time, mandating compensation permits publicly-oriented politicians to continue pursuing socially beneficial projects.

This explanation yields important insights into the optimal structure of takings compensation. First, current incentives to use eminent domain excessively in the service of private developers cannot be blunted by modifying compensation policy. Only by a separate policy that charges developers for the benefits they receive can reduce or eliminate such misuse of the taking power. Second, overcompensation is even worse than under-compensation insofar as corruption is concerned. For this reason, laws requiring the payment of fixed percentage bonus above market value to property condemnees are in error. Additionally, where judges are thought systematically to overrate the subjective value owners attach to their properties, market value compensation may have some merit. Third, public compensation cannot be replaced by a private insurance system, even if such insurance were practical, since insurance too would encourage corruption.

Ben Barros

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