Optimal Compensation for Regulatory Takings

24 Pages Posted: 24 Apr 2009

See all articles by Paul Pecorino

Paul Pecorino

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: April 21, 2009


One argument for forcing governments to pay compensation for regulatory takings is that they will tend to over regulate if compensation is not paid. In this paper, a model is developed in which there are two groups in society, one of which bears all of the costs of regulation. Regulation provides (potentially unequal) benefits to both groups. In the absence of compensation, a biased government will not choose the efficient level of regulation. If taxes are non-distorting, a compensation rule can be designed to achieve the first best outcome. The optimal rule always involves a positive degree of compensation regardless of the direction of the government bias. If the government is biased in favor of the regulated group, then compensation will increase the level of the regulation. When taxes are distortionary, the first best outcome cannot be achieved, and the optimal level of compensation may be 0.

Keywords: Takings, Regulation, Compensation

JEL Classification: K2, H4, D72

Suggested Citation

Pecorino, Paul, Optimal Compensation for Regulatory Takings (April 21, 2009). Available at SSRN: https://ssrn.com/abstract=1392927 or http://dx.doi.org/10.2139/ssrn.1392927

Paul Pecorino (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
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