Economic Analysis of Taking Rules: The Bilateral Case

Abstract

Our analysis focuses on a situation where a landowner and the government invest prior to the government's taking decision. When the government suffers from budgetary "fiscal illusion", optimal compensation amounts to the hypothetical value of the landowner's property had she invested efficiently. In contrast, under a government that maximizes social welfare, the only regime to induce the first best grants as compensation the social benefit of the taking. Consequently, if the government can only raise capital up to a certain amount, society may be better off under a non-benevolent government.

Keywords: Compensation for takings, eminent domain, moral hazard

JEL Classification: K11, R52, Q24