Taking Law, Compensation and Economic Analysis Hans-Bernd Schäfer Bucerius Law School (Hamburg)

Compensation for taking is generally lower than compensation in a civil liability claim. Differential method for calculating the damage in civil liability The differential method leads to full and comprehensive compensation If non-financial damages (sentimental value) are included

Compensation for Taking is less than full compensation Different relatively vague formulas: The Hull Formula in international law: “prompt, adequate and effective”

UN resolution on the “New International Economic Order”: “just compensation”. Constitution of the Republic of Korea “just compensation” (Art. 23,3). German Constitution: “Such compensation shall be determined by establishing an equitable balance between the public interest and the interests of those affected.” Art. 14 (3).

Legal rationale given for less than full compensation in the law of eminent domain: Compensation for taking is a legal act of the state in the public interest, for which the affected citizen might also contribute. Civil liability is for a wrongful act and therefore demands full compensation.

In most legal orders private property is a constitutional right and taking must be in the public interest. Can full compensation guarantee that taking decisions are in the public interest? Takings For private use, wealth increasing For public use, Welfare increasing

Taking for private use For instance land for an industrial plant, an agricultural business, a shopping mall, a private electricity or railway company. The only rationale for taking is the hold out position of some owners. The private investor is burdened with the compensation payment.

The private investor wants the land if his discounted profits are higher than the compensation. The higher valued use of the land is guaranteed if full compensation is paid according to the differential method and including all non financial damages. (The Calabresi Melamed proposition applies)

Taking for public use A public park, museum, bridge, road, waterway The public interest is not restricted to a higher valued use but to a larger number of constitutional values

The level of compensation cannot guarantee that a taking is in the public interest. Full or more than full compensation can have adverse effects “Suffer Injustice and Cash in”

Slip Road 2 Slip Road 2 Public Park 1 Public Park 1 Golf course 3 Golf course 3 Slip Road 2 Slip Road 2 Public Park 3 Public Park 3 Golf course 1 Golf course 1 Social Ranking of 3 projects (The third is not in the public interest and unconstitutional) Political Ranking of the same 3 projects unconstitutional

With full or higher compensation the dominant strategy for the affected is always to accept compensation, regardless of the constitutionality of the project. With less than full compensation the dominant strategy for the affected is to file for restitution. This is in the public interest, as only courts can separate unconstitutional from constitutional takings

Proposition: Takings for private use should be fully compensated. Takings for public use should be less than fully compensated to motivate the affected to fight for their rights. BUT This presupposes independent courts, protecting the law and taking decisions against the government if a taking is not in the public interest.

In countries with a weak legal system this does not work and low compensation leads to underinvestment on the later condemned land. A second best solution is full compensation It cannot avoid the misuse of eminent domain rights. But it can avoid underinvestment on the later condemned land.