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Police Powers, Regulatory Takings and the Efficient Compensation of Domestic and Foreign Investors

Emma Aisbett, Larry Karp and Carol McAusland ()

The Economic Record, 2010, vol. 86, issue 274, 367-383

Abstract: Modern international investment agreements have challenged the customary exclusion of public good regulations from being considered government 'takings' subject to compensation rules. Full compensation for regulatory takings can, however, lead to over-investment and excessive entry in risky industries. An alternative is to 'carve-out' apparently efficient regulation from compensation requirements. We design a carve-out/compensation rule that induces efficient regulation and firm-level investment even when the regulator suffers fiscal illusion and has private information about the social benefit from regulation. We also show that a carve-out reduces the subsidy to risky industry implicit in compensation rules, and thus mitigates the entry problem. Copyright © 2009 The Economic Society of Australia.

Date: 2010
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Handle: RePEc:bla:ecorec:v:86:y:2010:i:274:p:367-383