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Private Takings

Author

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  • Marchesiani, Alessandro

    () (University of Bath)

  • Nosal, Ed

    (Federal Reserve Bank of Chicago)

Abstract

This paper examines the implications associated with a recent Supreme Court ruling, Kelo v. City of New London. Kelo can be interpreted as supporting eminent domain as a means of transferring property rights from one set of private agents — landowners — to another private agent — a developer. Under voluntary exchange, where the developer sequentially acquires property rights from landowners via bargaining, a holdout problem arises. Eminent domain gives all of the bargaining power to the developer and, as a result, eliminates the holdout problem. This is the benefit of Kelo. However, landowners lose all their bargaining power and, as a result, their property investments become more inefficient. This is the cost of Kelo. A policy of eminent domain increases social welfare compared to voluntary sequential exchange only when the holdout problem is severe, and this occurs only if the developer has very little bargaining power. We propose an alternative government policy that eliminates the holdout problem but does not affect the bargaining power of the various parties. This alternative policy strictly dominates a policy of eminent domain, which implies that eminent domain is an inefficient way to transfer property rights between private agents.

Suggested Citation

  • Marchesiani, Alessandro & Nosal, Ed, 2014. "Private Takings," Working Paper Series WP-2014-26, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2014-26
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    References listed on IDEAS

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    1. Nosal, Ed, 2001. "The taking of land: market value compensation should be paid," Journal of Public Economics, Elsevier, vol. 82(3), pages 431-443, December.
    2. Hermalin, Benjamin E, 1995. "An Economic Analysis of Takings," Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(1), pages 64-86, April.
    3. Thomas A. Garrett & Paul Rothstein, 2007. "The taking of prosperity? Kelo vs. New London and the economics of eminent domain," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jan, pages 4-9.
    4. Eckart, Wolfgang, 1985. "On the land assembly problem," Journal of Urban Economics, Elsevier, vol. 18(3), pages 364-378, November.
    5. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
    6. Rohan Pitchford, 2003. "Coming to the Nuisance: An Economic Analysis from an Incomplete Contracts Perspective," Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(2), pages 491-516, October.
    7. Lawrence Blume & Daniel L. Rubinfeld & Perry Shapiro, 1984. "The Taking of Land: When Should Compensation Be Paid?," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 71-92.
    8. Munch, Patricia, 1976. "An Economic Analysis of Eminent Domain," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 473-497, June.
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    Cited by:

    1. Kurtis Swope & Pamela Schmitt & John Cadigan & Ryan Wielgus, 2010. "Contracts, Behavior, and the Land-Assembly Problem:An Experimental Study," Departmental Working Papers 29, United States Naval Academy Department of Economics.
    2. Cadigan, John & Schmitt, Pamela & Shupp, Robert & Swope, Kurtis, 2011. "The holdout problem and urban sprawl: Experimental evidence," Journal of Urban Economics, Elsevier, vol. 69(1), pages 72-81, January.
    3. John Cadigan & Pamela Schmitt & Robert Shupp & Kurtis Swope1, 2009. "An Experimental Study of the Holdout Problem in a Multilateral Bargaining Game," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 344-457, October.
    4. Usha Sridhar & Sridhar Mandyam, 2013. "A Group Utility Maximizer Mechanism for Land Assembly," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 466-488, October.
    5. Cunningham, Chris, 2013. "Estimating the holdout problem in land assembly," FRB Atlanta Working Paper 2013-19, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    Private Property; Private Takings; Property Rules; Liability Rules;

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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