Why full compensation for property owners might lead to more unlawful takings

"Land grabbing" is a term often used for corrupt and illegal government practices in lawless countries. It has been extended to poorly checked eminent domain power combined with under-compensation even in highly developed rule of law states like the United States, as Ilya Somin showed in his book on the Kelo case. This happens even though almost all democracies -India is a notable counterexample- regard private property as a human right, whose infringement with eminent domain power is subject to judicial review.

The low protection of private property in combination with low compensation is a leftover of the "big government" era in which the state was believed to need ample discretion to develop the economy from above. A brand of Keynesianism calling for the state to always guarantee the overall level of an economy's investment, and development economics of the 1950s contributed much to this view. In Korea, as much as in India and China, the use of eminent domain has become a pressing political issue. Iljoong Kim and Hojun Lee took the initiative to discuss these matters for Korea. I was glad to contribute to the volume they put together. My chapter builds on some observations from German taking law and the protection of owners in administrative and constitutional law.

Many authors propose to increase compensation for taking as a remedy for eminent domain abuse. This might guarantee that unworthy projects do not get off the ground. The argument is in line with the well-known proposition put forward by Guido Calabresi and Douglas Melamed: Any right should in principle be protected by an injunction, because this guarantees that the resource related to the right will be transferred only to a higher valued user and only through a voluntary transaction.

But if transaction costs are prohibitively high, which includes the existence of numerous veto and hold up positions, an involuntary transaction might be preferable. If compensation is full and covers all damages, including losses from interference with a contract, expected gains which are not part of the market price for land, and non financial losses such as sentimental value, the involuntary will occur only if the new user places a higher value on the land than the old one. I think that this argument is flawed and that the law can either better protect private property or grant generous compensation to owners but not both.

The argument has a serious limitation: It is valid only if the new investor is profit-oriented and required to pay all compensation payments. It does not hold for public use of land, such as a bridge, a public university or a military base. The economic analysis of state liability then differs from the analysis of civil liability and the Calabresi-Melamed proposition does not hold. Unlike a private actor, a government does not maximize income but uses other metrics like votes or power, when deciding which projects to pursue. If a taking is for public use, full compensation cannot guarantee that a taking leads to the higher-valued use of a resource or contributes to the public interest. Even if owners get full compensation, an economically meritless project can have high political benefit, if it is supported by influential interests. In such cases, only courts are in a position to question the legality of the taking and compensation payment.

Full compensation can neither guarantee efficiency nor any other public benefit behind a taking decision. It may make things worse, in so far as t removes all incentives for private owners to challenge takings. Owners would then develop an attitude of "accept injustice and cash in" rather than filing cases against unlawful or unconstitutional government acts.
It is in the interests of the public that citizens defend themselves against unlawful acts of their government rather than settle for generous compensation. Compensation that is somewhat lower than a full damage award, motivates citizens to fight for their rights - for restitution of their land. They will do so if restitution is worth more to them than damage compensation and if the law erects high hurdles against takings.

These hurdles seem to be higher in some countries like Germany as compared to those in the US. In countries that use the proportionality principle in public and constitutional law the necessity test derives from this principle and courts would check, whether the land must be taken to realize the public use project. The claimant could then argue that not all the land taken is necessary to realize the project or that a less coercive intervention than taking - for instance an easement - would be sufficient to realize the project or that the government has already enough land in the vicinity to realize it. He could even argue that a second slip road to the highway in a small city has small advantages for those who benefit from it but cuts too deeply into the ownership rights of many landowners.

Other legal norms, especially constitutional safeguards, might serve as proxies for a necessity test, which is often not feasible if courts lack the information. Constitutional law can require that the rationale for taking must be precisely specified in a statute.
Energy safety or education could meet this test. But "economic development" should be rejected as too vague.

Similarly, a rationale of increasing tax income for a municipality should be rejected as unconstitutional, because increasing tax income is not per se in the public interest. Municipal laws, for instance zoning laws should not qualify as a legal basis for taking at all. This would guarantee that parliaments pass taking laws on the state or federal level, where the influence of local interest groups, which often lead to problematic projects, is comparatively small. Such safeguards can help courts to sort out the taking decisions, which are not in the public interest, and return the land to its owners.

Less than full compensation thus helps to achieve an important policy objective:, preventing takings that are in the interests of politicians but not in the public interest. Compensation rules that often allow for some deduction from full compensation and thus impose some personal contribution to a lawful taking in the public interest, find a justification in these economic considerations. They make citizens guardians of the law and create a web of tight controls limiting takings that are politically preferable but not in the public interest.

Generously compensated owners are lulled into apathy and lose any incentive to contest unlawful takings. That may lead to deformed, disfigured cities and landscapes, as politicians cater to special interests and do not care about how much compensation they had to pay from taxpayer funds. Such damages are real, but not attached to any ownership right whose infringement requires compensation.