Economic Value or Fair Market Value: What Form of Takings Compensation Is Efficient?

Abstract

The literature has generally accepted that if full takings compensation is paid, owners will over-invest. Condemnors are often assumed to be either a social wealth maximizer or suffer from fiscal illusion. Costs and accuracy of assessing property value for takings compensation purposes are important, yet have never been systematically analyzed. I argue that under current law, owners hardly have incentives to overinvest no matter economic value or fair market value is awarded as compensation. Government officials as condemnors maximize their own political interests, not their agency’s or the society’s interests. Considering condemnors’ and condemnees’ incentives alone, economic value compensation is the most efficient; fair market value compensation will be suboptimal. After taking into account assessment costs and assessment accuracy as well, I argue that fair market value plus a schedule of proportional bonus (based on the length of tenure, etc.) should be given to homeowners. Non-residential property owners, because their economic value approximates fair market value, are entitled only to fair market value compensation (without bonus).

Keywords: Economic value, fair market value, takings compensation, incentives Assessment costs, assessment accuracy, assessment method

JEL Classification: K11