Fair and Efficient Compensation for Taking Property under Uncertainty

Abstract

Existing mechanisms for managing eminent domain suggest that, when there is uncertainty about whether a government will take property, efficiency requires that the property owner receive at most partial compensation. We argue that announcing the possibility of a taking is itself a taking when this implies that further investments will not be compensated. We argue that it is both fair and efficient to require governments to compensate owners for losses in asset value from such announcements. We propose a mechanism that provides incentives for both efficient investment and efficient takings, while paying full compensation for expected losses under efficient behavior. Copyright 2005 Blackwell Publishing Inc..