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Takings of Land by Self-interested Governments Economic Analysis of Eminent Domain

Hans-Bernd Schäfer and Ram Singh
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Hans-Bernd Schäfer: Bucerius Law School, Hamburg
Ram Singh: Department of Economics, Delhi School of Economics

No 281, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: In this paper, we model and examine the effects of two salient features of the eminent domain law and its use. First, the compensation is less than ‘full’. Second, the government is not a perfect agent of the society. Once these features are factored in, several claims in the existing literature do not hold. Our results question the ‘fiscal-illusion’ theory. We show that the full compensation ensures efficiency neither of the takings nor of the investment decisions. Moreover, things can get worse with tightening of the budget constraints. However, under-compensation combined with the provision of restitution delivers a better outcome - in terms of investment choices by the owners as well as the taking decisions and project choices by the government. Further, we show that fixed-compensation schemes generally are not efficient even if the government is benevolent, but under-compensation can still deliver outcome more efficient than the full compensation.

Date: 2017-11
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