Takings, the Exit Option, and Just Compensation

Abstract

There are several distinct interpretations of the Fifth Amendment of the Constitution mandate of the payment of just compensation for the taking of private property for a public use. The traditional economic position, put forward by Blume, Rubinfeld and Shapiro, is that just compensation requirements in the absence of imperfect markets will lead to overcapitalization. Richard Epstein calls for a broad interpretation of the Takings Clause to protect private property from redistributionist policies. Frank Michaelman interprets the Takings Clause as a means to insure efficient government regulation when demoralization costs are considered in the cost-benefit calculus. This paper starts with a discussion of the omission of demoralization costs in traditional economic models of takings. By addressing this omission, this paper contributes to the growing literature on the political economy of takings (see Been, Fischel, and Sterk) by exploring the effect of the exit option on optimal takings and compensation rules. While previous economic models have considered the takings game in the context of a single jurisdiction, this paper models the takings problem in a multi-jurisdictional context. The model is used to analyze whether states should take, purchase, or tax to finance a public project when citizens have the exit option. The model developed in this paper provides the necessary first step to develop a richer, more complete model of takings, taxation, state competition, and exit.