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The Hidden Function of Takings Compensation

To date, scholars have justified the constitutional mandate to pay compensation for takings of property on the intuitively appealing grounds that fairness demands recompensing aggrieved owners; on the basis of a belief that government that fails to pay will suffer from “fiscal illusion” and take excessively; or due to the need to neutralize politically powerful property owners who would otherwise foil socially beneficial projects.

This Essay offers a new explanation of the role of takings compensation in ensuring good government. Inspired by public choice theory, we argue that takings compensation is intended to reduce the incentives for corruption by limiting the ability of politicians to profit from takings. Specifically, we show that mandating compensation reduces the funds self-serving politicians can extort from property owners. At the same time, mandating compensation permits publicly oriented politicians to continue pursuing socially beneficial projects.

This justification for compensation also yields important insights into the optimal structure of takings compensation. First, current incentives to use eminent domain excessively in the service of private developers cannot be blunted by modifying compensation policy. These undesirable incentives can be reduced or eliminated only by a separate policy that charges developers for the benefits they receive. Second, overcompensation is even worse than under-compensation insofar as corruption is concerned. For this reason, we should look skeptically at laws requiring the payment of fixed percentage bonus above market value to property condemnees. Additionally, market value compensation might be attractive, notwithstanding its shortcomings, where judges are thought systematically to overrate the subjective value owners attach to their properties. Third, our theory demonstrates that a private insurance system for compensating property owners for takings is not only impractical but undesirable, as it, too, could encourage political corruption.

Multiple Gatekeepers

In the context of business transactions, gatekeepers are lawyers, investment bankers, accountants and other actors with the capacity to monitor and control the disclosure decisions of their clients – and thereby to deter corporate securities fraud. After each wave of corporate upheaval, including the recent financial crisis, the spotlight of responsibility invariably falls on gatekeepers for failing to avert the wrongs of their clients. A rich vein of literature has considered what liability regime would lead gatekeepers optimally to deter securities fraud, but has overlooked the phenomenon that multiple interdependent gatekeepers act on business transactions and thus form an interlocking web of protection against wrongdoing. To date the literature has adopted a unitary conception of the gatekeeper, assuming that a single gatekeeper acts on a transaction or, where multiple gatekeepers are involved, that each is independently capable of deterring securities fraud.

This article explains the pattern of multiple gatekeeper involvement that characterizes business transactions. It analyzes why gatekeepers exist at all and why corporations turn to a multiplicity of them for most transactions. It then extends gatekeeper liability theory to account explicitly for the possibility that the fraud-deterrence capacity of gatekeepers will be interdependent, and not simply independent. In doing so, the article draws on optimal deterrence theory and analogizes the position of multiple gatekeepers with that of joint tortfeasors. The article also assesses the U.S. federal securities law regime from the perspective of the prescriptions of gatekeeper liability theory, identifying gaps in the regime that arise from the fragmentation of gatekeeping services and suggesting reforms designed to compel cooperation among gatekeepers to fill them. The theory has implications for the post-financial crisis reform proposals that would impose gatekeeper liability on credit rating agencies, which the article specifically considers.

The National Convention Constitutional Amendment Method: Defects, Federalism Implications, and Reform

The amendment provisions of the United States Constitution have a serious defect. Although some commentators claim that the supermajority rules in these provisions are too strict, that is by no means clear. Rather, the clear defect in the amendment provisions is that the only effective way they provide of amending the Constitution requires Congress’s approval and therefore Congress enjoys a veto over all amendments. While the Constitution does formally allow the state legislatures to seek to amend the Constitution through a national convention, that amendment method is broken. Not only has the national convention method never been used to pass an amendment or even to call a convention, the state legislatures are unlikely to ever use this method, because of the state legislatures’ fear of a runaway convention that might seek to enact constitutional amendments that they strongly dislike.

This congressional veto over amendments has significant normative implications. It suggests that the Constitution cannot be amended in a way that will constrain congressional power. It also makes it unlikely that the Constitution can be amended to limit the federal government or to expand state authority, because Congress is unlikely to support these changes. While it has often been assumed that the increased nationalism of the Constitution and government over the course of American history reflects changes in technology and values, a significant portion of this nationalist movement may instead be the result of a biased amendment procedure.

In addition to exploring the normative implications of the broken amendment procedure, the article also proposes a new amendment method. Under this state drafting procedure, an amendment would be enacted when it was approved by two thirds of the state legislatures and was ratified by three quarters of the states through either state conventions or ballot measures. Finally, the article argues that this reform of the amendment procedure could actually be passed under the national convention method and proposes a strategy for enacting it.

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