Research Handbook on the Economics of Property Law
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Research Handbook on the Economics of Property Law

Edited by Kenneth Ayotte and Henry E. Smith

Leading scholars in the field of law and economics contribute their original theoretical and empirical research to this major Handbook. Each chapter analyzes the basic architecture and important features of the institutions of property law from an economic point of view, while also providing an introduction to the issues and literature.
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Chapter 16: Acquiring Land Through Eminent Domain: Justifications, Limitations, and Alternatives

Daniel B. Kelly


Daniel B. Kelly* I. INTRODUCTION The government often seeks to acquire land, either for itself (for roads, schools and other public projects) or on behalf of private parties (such as real-estate developers and corporations) whose private projects may entail certain public benefits. Typically, the government can acquire such land in one of two ways: (i) it can purchase the land through consensual transactions; or (ii) it can take the land using eminent domain. Consensual transactions require the government to buy parcels from existing landowners at bargained-for prices that are mutually acceptable. Eminent domain allows a government (the ‘condemnor’) to condemn land, even if one or more of the existing owners is unwilling to sell, in exchange for providing owners (the ‘condemnees’) with just compensation based on the ‘fair market value’ of their property. This chapter explores the justifications for, limitations of and alternatives to the government’s use of eminent domain. The primary functional justifications for eminent domain involve bargaining problems, including the holdout problem, the bilateral monopoly problem and other transaction costs, as well as the existence of externalities. The holdout problem is particularly noteworthy, and this chapter analyzes three types of holdouts, depending on whether the failure in bargaining is the result of strategic behavior among owners, the presence of a large number of owners or a single owner who is unwilling to sell because of a highly idiosyncratic valuation (see infra Part II). Although eminent domain solves any potential bargaining problems by transferring land directly from existing owners...

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