The takings clause of the 5th Amendment to the U.S. Constitution states, in part,
Nor shall private property be taken for public use without just compensation.
Much debate addresses the phrase “public use.” In Kelo v. New London, CT
, the Supreme Court held that economic development constitutes public use even if a private developer receives the “taken” property. A new case just getting started pushes public use even farther. As Edward Herlihy explains in the Wall Street Journal
, the village of North Hills, Long Island, wants to condemn a private golf course in order to replace it with—you guessed it—a “public” golf course.
These cases seem to stretch the concept of public use so far as to make it meaningless. Providing a clean definition, however, is not trivial. So consider the other key phrase in the takings clause, “just compensation.”
One definition is the price at which the property in question would sell on the open market.
An alternative is “willingness-to-sell,” the minimum price at which a property owner would sell voluntarily. Willingness-to-sell can exceed market price. For example, an elderly couple might attach sentimental value to staying in their home.
Willingness-to-sell is the preferable concept from the perspective of economic efficiency. If government forces property owners to sell at a lower price, this imposes a loss that is relevant to calculating whether a government project is desirable.
Current practice in eminent domain cases, however, uses market price as just compensation. That is why situations like New London arise. Government offers the market price, and many property owners sell. A few hold out, however, so the government then uses its eminent domain powers.
What if governments used willingness-to-sell as the measure of just compensation?. Assume for the moment sellers honestly state their true willingness-to-sell.
Under this assumption, the takings clause is irrelevant. The government does not need eminent domain powers to conduct voluntary transactions with property owners.
The problem is that owners might try to “hold up” governments by stating ridiculous willingness-to-sell prices. Whether this problem is serious in practice, however, is not clear.
If property owners overstate their willingness-to-sell, they risk blocking transactions entirely. In that case, they gain nothing. Indeed, rational property owners will overstate only to the point where the government project still occurs. Overstatement therefore transfers wealth to the property owners, but it does not reduce efficiency. In practice, some owners might hold out for ridiculous amounts, in which case some valuable projects would not occur. But the magnitude of this loss might be modest.
The ideal way to apply the takings clause is thus not obvious. My hunch is that using willingness-to-sell as the measure of just compensation would improve resource allocation on average. In the absence of evidence examining this approach, however, it is difficult to know for sure.