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Political Economy and the Efficiency of Compensation for Takings
Timothy J. Brennan, James W. Boyd
RFF Discussion Paper 95-28 | June 1995
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Abstract
The paper considers the desirability of compensation for land value or investments lost as a result of regulation. We model political support for regulation as a function of the external costs of land use, the impact of regulation on landowner wealth, and the social cost of compensation. Modeling the regulator's incentives in this way leads to the conclusion that compensation should not be paid unless environmentalists and property owners have unequal influence politically. Moreover, the model has several counter-intuitive implications when political influence is not balanced. For instance, if environmentalists are disenfranchised they should support compensation, since it reduces property owner opposition to regulation. In contrast, if environmentalists wield disproportionate influence, penalizing rather than compensating landowners can induce more efficient regulation by stimulating landowner opposition. The analysis emphasizes the deadweight social costs of compensation and the desirability of compensation rules conditioned on both diminited land value and irreversible landowner investments. In addition, we argue that takings compensation can be used to improve the timing, as well as the strength, of regulation.
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