Business Formation in the Wake of States’ Responses to Kelo

31 Pages Posted: 17 Jul 2012  

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

Tianning Li

Hood College

Date Written: July 16, 2012

Abstract

On June 23, 2005, the U.S. Supreme Court ruled in Kelo v. City of New London, 505 U.S. 469 (2005) that the Public Use Clause allows governments to take private property for transfer to new private owners for the purpose of promoting “economic development.” Our theoretical model identifies the circumstances under which Kelo and subsequent state laws affect business formation. We show that business creation can be encouraged, unaffected, or discouraged as the probability of takings increases, depending on the level of compensation for the takings and the magnitude of the owners’ public use benefits. We also show that utility-maximizing entrepreneurs’ choices of investment depend on the probability of takings and the level of government compensation for the taking. Our empirical results yield three insights. First, states and municipalities can pass laws protecting property rights without fear of retarding business formation. Second, we identify explanations why Kelo and these laws do not measurably affect business formation in our empirical work. Specifically, we believe that either government entities correctly compensate entrepreneurs for the disruption in their businesses through eminent domain legislation, or that the change in the probability of such takings is very small, so that any effect on business formation is too small to measure. Third, takings open the possibility for political corruption and distortions in the economy by encouraging overpayment or underpayment for takings. Under this interpretation, local laws against takings are not pro-business laws or anti-business laws. Rather, they are anti-corruption laws.

Keywords: Kelo, eminent domain, property rights, business formation, start ups

JEL Classification: M13, D23, K20, K30, H41, H49

Suggested Citation

DeGennaro, Ramon P. and Li, Tianning, Business Formation in the Wake of States’ Responses to Kelo (July 16, 2012). Available at SSRN: https://ssrn.com/abstract=2109761 or http://dx.doi.org/10.2139/ssrn.2109761

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

Tianning Li

Hood College ( email )

401 Rosemont Avenue
Frederick, MD 21701
United States

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