Compensation for Takings: An Economic Analysis
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Description
The Fifth Amendment to the United States Constitution prohibits the government from taking private property for public use without just compensation. In situations not involving physical invasion, called regulatory takings, courts have occasionally found that regulation goes too far and constitutes a taking. Support for compensation for regulatory takings has grown among scholars, but relatively little has been written on the role of compensation as a form of insurance against regulatory risks. This article provides such an economic analysis, in the process evaluating the efficiency arguments both for and against compensation. Generally, the risks associated with changes in regulatory policies impose costs on investors. Although one might expect investors to avoid the costs associated with risk by obtaining insurance in the private market, such insurance is often not available because of market failure. Thus, government-provided insurance represents a potentially attractive alternative. However, for reasons related to private market failure, this article argues that government-provided insurance must be offered after the fact in the form of compensation for regulatory takings. The payment of compensation itself is costly, not only in the transfers that arise, but also in the distortions created and administrative cost borne. Therefore, the article suggests that the economic argument for compensation is strongest in situations in which the risk of loss is large relative to individual wealth, or (as a practical alternative) large relative to the magnitude of the loss. The effects of such a proposed change in the granting of compensation could also have a substantial effect on the decisionmaking of the regulatory bodies, since a greater part of the actual cost of regulating would now appear on the budget of the regulatory body. In addition to these issues, we argue that the nature of the compensation made should depend upon the extent to which the measurement of compensation can itself be influenced by the behavior of individual landowners.
Source Publication
Law and Economics Anthology
Source Editors/Authors
Kenneth G. Dau-Schmidt, Thomas Ulen
Publication Date
1998
Recommended Citation
Blume, Lawrence and Rubinfeld, Daniel L., "Compensation for Takings: An Economic Analysis" (1998). Faculty Chapters. 1851.
https://gretchen.law.nyu.edu/fac-chapt/1851
