Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent Domain Exercises

Abstract:     

The principal justification for mandating compensation when land is taken for public uses is that it is necessary to cure government officials of a “fiscal illusion” problem. To date, however, this justification has never been empirically tested in the takings context. We took advantage of a unique feature of Israeli law which permits local government to expropriate up to 40% (by size) of any parcel without compensation, while since 2001 mandating full compensation for total takings of 100%, to test the fiscal illusion hypothesis. We collected data about all the takings in Tel Aviv between 1990 and 2014 (3,140 cases). We expected to see a disproportionately large share of takings around the 40% kink point. Surprisingly, our analysis revealed no discontinuity around the 40% mark; in fact, the rate of takings in the 25%-99% range was very low. The real discontinuity point was at 100%, where nearly a half of the takings were concentrated. Remarkably, the share of cases of total taking (taking share of 100%) was even greater after the law was changed (in 2001) to require full compensation, despite some signs of a reversible drop in the relative share of total takings immediately after the legal change. Our findings suggest that the fiscal illusion hypothesis may not accurately capture the full range of motivations of government officials in the takings context. Our results lend qualified support to an alternative hypothesis according to which officials are motivated not only by budgetary concerns, but also by actual needs and fairness considerations.

Keywords: Eminent Domain, Fiscal Illusion, Takings

JEL Classification: K00, K11