Blume, Rubinfeld, and Shapiro (1984) first showed that compensation for takings can lead to a moral hazard problem that results in overinvestment in land suitable for public use. To the contrary, this paper shows that the compensation rule is irrelevant regarding the level of investment landowners make in their property, as well as the amount of land they authorize the government to acquire, both of which will be efficient. Intuitively, landowners recognize the equivalence of taxes and takings in budgetary terms, causing the distortionary effects of compensation and property taxation to cancel each other out through the balanced budget condition.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2007-02.
Length: 18 pages Date of creation: Feb 2007 Date of revision: Handle: RePEc:uct:uconnp:2007-02
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Find related papers by JEL classification: H41 - Public Economics - - Publicly Provided Goods - - - Public Goods K11 - Law and Economics - - Basic Areas of Law - - - Property Law R52 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - Land Use and Other Regulations
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