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[Nicole Garnett (guest-blogging), February 12, 2007 at 3:16pm] Trackbacks
What Undercompensation Problem?

Many thanks to Eugene for inviting me to blog about The Neglected Political Economy of Eminent Domain. As Eugene notes, I come to this subject with strong priors – I worked for the Institute for Justice (Susette Kelo’s attorneys), and I disagree with (although I was not surprised by) the holding in the Kelo case. In a previous article, I also used the undercompensation risk to justify strong public-use review. Thus, it is fair to say that I was surprised, upon further investigation, to reach the conclusion stated in the article—that legal scholars may overestimate the extent of the undercompensation problem.

I’ll divide my discussion into five posts. This first post explains why legal scholars assume that owners are undercompensated when their property is taken by eminent domain; it also argues that traditional discussions of eminent domain have been too court-centric, leading scholars to overlook the critical role that non-judicial government actors (“Takers”, if you will) play in the eminent domain process. On Tuesday, Wednesday, and Thursday, my posts will discuss three ways that “Takers” may minimize undercompensation. Finally, on Friday, I will explain why I believe that so-called “economic development takings” are problematic even if most owners receive above-market compensation.

The “Undercompensation Problem”

Scholarly concern about undercompensation flows from the fact that the constitutionally mandated measure of compensation in an eminent domain action — i.e, the property’s fair market value — can fail to indemnify owners fully. As Lee Fennell has helpfully described, the losses suffered by an owner whose property is taken by eminent domain may have both a “compensated increment” (the fair market value award) and an “uncompensated increment” (the owner’s losses exceeding that award). The "uncompensated increment" may be made up of any (or all) of the following losses:

Economic Losses: Fair-market-value compensation does not cover relocation expenses, good will associated with a business’s location; it may also fall short of replacement value. Eminent domain also deprives owners of the gains from trade that a market transaction might generate. The inability to say “no” unquestionably leaves many owners worse off than if they had freely negotiated a purchase price. (This is not surprising. After all, the need to avoid holdouts strategically seeking unjust gains from trade is a common justification for eminent domain.)

Subjective Losses: An owner may value her property more its market price. Cognitive psychologists and experimental economists have found that possession alone generates an “endowment effect” – i.e., individuals consistently demand more to part with an entitlement than they would be willing to pay for it in the first instance. While this “offer-ask” disparity only trivially affects most markets, it is greatest for episodic events such as an eminent domain action. Additionally, an owner’s sentimental attachment to her property - for example, the attachment resulting from the property's connection to family and community relationships - may widen this disparity between subjective- and market-value.

Dignitary Losses: Carol Rose has observed that “there is something about land that makes you think that when you own it, it is really, really yours.” Perhaps for this reason, targets of eminent domain may suffer what can be broadly categorized as “dignitary harms.” Owners may feel unsettled upon learning that the government plans to take their property. Expanding the scope of the takings power may increase all property owners’ feelings of vulnerability. As Justice O’Connor observed in Kelo, “The specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

Owners also may attach independent, non-instrumental significance to the economic autonomy that property guarantees. The loss of economic autonomy may be particularly upsetting in the economic development context, for at least two related reasons: First, owners may be offended by the government’s implicit suggestion that the current use of their property is less than socially optimal and that some other private owner would put it to a “better” use. Second, property owners may feel that the government has treated them unfairly vis-à-vis other owners. To borrow from Saul Levmore’s work in the regulatory takings context, every exercise of eminent domain “singles out” individual property owners to bear the cost of broader societal goals. The knowledge that the government could have advanced its plans by taking someone else’s property may leave property owners asking “why me”?

A Non-Court-Centric Approach to Understanding Eminent Domain

The possibility that property owners may be undercompensated in the eminent domain process is frequently cited in the literature discussing the public-use problem. Some commentators—including myself—cite the potential for undercompensation as one reason that judicial policing of the boundary between “public” and “private” takings is needed. Others—most recently Professors James Krier and Chrisopher Serkin—have explicitly suggested additional compensation as an alternative to judicial review of public-use claims. Most of the eminent domain literature, however, ignores the important role of non-judicial government actors (the people that I call “Takers”) in the eminent domain process. Understanding Takers’ role is important because judges play only a bit part in the eminent domain process. Takers, not judges, shape projects, identify the property needed to complete them, and negotiate with property owners prior to instituting formal eminent domain actions. Indeed, in the vast majority of cases, formal eminent domain proceedings are never commenced.

The universal disregard for how eminent domain works outside of the courtroom may have led previous commentators (again, including myself) to overstate the undercompensation problem. Takers operate under incentives that should minimize undercompensation: They need to avoid holdouts and the political fallout from negative publicity. They are legally obligated to bargain with property owners and penalized financially if these negotiations fail. And they almost always are legally required to provide substantial relocation assistance to displaced owners. While the evidence presented here is incomplete—further study is in order—my article represents an important first step toward understanding how Takers’ behavior shapes the nature and extent of the undercompensation problem.

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