Private Takings

43 Pages Posted: 19 Dec 2014

See all articles by Alessandro Marchesiani

Alessandro Marchesiani

University of Bath - Department of Economics

Ed Nosal

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: December 2, 2014

Abstract

This paper examines the implications associated with a recent Supreme Court ruling, Kelo v. City of New London. Kelo can be interpreted as supporting eminent domain as a means of transferring property rights from one set of private agents — landowners — to another private agent — a developer. Under voluntary exchange, where the developer sequentially acquires property rights from landowners via bargaining, a holdout problem arises. Eminent domain gives all of the bargaining power to the developer and, as a result, eliminates the holdout problem. This is the benefit of Kelo. However, landowners lose all their bargaining power and, as a result, their property investments become more inefficient. This is the cost of Kelo. A policy of eminent domain increases social welfare compared to voluntary sequential exchange only when the holdout problem is severe, and this occurs only if the developer has very little bargaining power. We propose an alternative government policy that eliminates the holdout problem but does not affect the bargaining power of the various parties. This alternative policy strictly dominates a policy of eminent domain, which implies that eminent domain is an inefficient way to transfer property rights between private agents.

Keywords: eminent domain, holdout problem, property rights

JEL Classification: H11, R38, R5

Suggested Citation

Marchesiani, Alessandro and Nosal, Ed, Private Takings (December 2, 2014). FRB of Chicago Working Paper No. 2014-26. Available at SSRN: https://ssrn.com/abstract=2539788 or http://dx.doi.org/10.2139/ssrn.2539788

Alessandro Marchesiani

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Ed Nosal (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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