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.