Compensation for Regulatory Takings with a Redistributive Government

University of Alabama Economics, Finance and Legal Studies Working Paper No. 09-09-03

21 Pages Posted: 11 Sep 2009

See all articles by Paul Pecorino

Paul Pecorino

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

Date Written: September 11, 2009

Abstract

Richard Epstein has argued that, in a fairly broad range of circumstances, governments should pay compensation for regulatory actions which impose costs on a subset of society. I develop a model in which there are two groups, one of whom benefits from a regulation, and one of whom bears the costs. A potentially biased government sets the level of the regulation, and this government may also redistribute income across the two social groups via the tax system. When taxes are nondistortionary, the government chooses the efficient level of the regulation in order to maximize wealth, and then uses the tax system to distribute this wealth according to its own biased preferences. If the government is forced to pay compensation for the costs of the regulation, it simply undoes this via the tax-transfer system. When taxes are distortionary, the government may not choose the wealth maximizing level of the regulation when compensation is not paid. It turns out, however, that societal wealth is monotonically decreasing in the degree of compensation to be paid, so that the optimal level of compensation is zero.

Keywords: takings, regulation, compensation, redistribution

JEL Classification: K2, H4, D72

Suggested Citation

Pecorino, Paul, Compensation for Regulatory Takings with a Redistributive Government (September 11, 2009). University of Alabama Economics, Finance and Legal Studies Working Paper No. 09-09-03, Available at SSRN: https://ssrn.com/abstract=1472004 or http://dx.doi.org/10.2139/ssrn.1472004

Paul Pecorino (Contact Author)

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

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-0379 (Phone)
205-348-0590 (Fax)

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