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This paper surveys the literature on eminent domain, particularly as it pertains to economic development projects. This survey is timely because of the recent Supreme Court decision in the case of Kelo v. City of New London. The majority of the Court now equates public use to public purpose and approves of the Connecticut local economic development statute. However, the Kelo decision generated much controversy at local, state, and federal levels. Use of the power of eminent domain for economic development projects remains controversial because of the perception that the definition of public use has become too broad in that transfer of property from one private owner to another is involved-even though "just compensation" is provided and a public purpose motivates the property acquisition. The debate seems to pit one idea of conservatism (judicial restraint) against another (inviolability of property rights). [PUBLICATION ABSTRACT]

The decision of the U.S. Supreme Court in the case of Kelo v. New London, 545 U.S. 2655 (2005), holds that municipalities may use the power of eminent domain to implement an economic development project that is fully consistent with state statute. The ruling has induced a widespread backlash in the U.S. Congress, in state legislatures, in some courts, and elsewhere that likely will produce legislation that would limit the use of eminent domain for economic development. The Kelo case has brought the issue of eminent domain back to prominence. The Takings Clause of the Fifth Amendment to the Constitution states "... nor shall private property be taken for public use, without just compensation." Originally the Takings Clause applied only to the federal government (not the states), but the Supreme Court ruled in 1897 that the due process clause of the Fourteenth Amendment (adopted in 1868) means that the Takings Clause applies to the states as well. This clause raises two fundamental issues: what is public use, and consequently, what is just compensation? The purpose of this article is to review the legal and economic issues of eminent domain, with particular reference to economic development projects.

The Kelo case provides a timely starting point for a review of eminent domain. The various parties who submitted briefs either supporting Kelo or New London cover all of the pertinent issues reflected in the literature framing the use of eminent domain for economic development purposes. These pertinent issues from the Kelo case include deciding whether economic development fulfills the public use requirement in the Fifth Amendment: land assembly, transaction costs, and the transfer of property; risk and burden; whether a stricter test should be included to satisfy the public use requirement; just compensation; and whether the Supreme Court should defer to the states in deciding the proper course of defining "public use." The fundamental question is the extent to which the Fifth Amendment protects property owners when eminent domain is used for economic development, which separates economic development from more traditional uses of eminent domain, such as slum clearance and blight reduction. The logic is that the project will increase tax revenues and improve the local economy, but the extent of the tax increase and impact on the local economy is uncertain.

The power of eminent domain originates in English Common Law, and is known in the United Kingdom as compulsory purchase. The legal theory is that all land is held in allodial title by the sovereign on that land. Thus in English Common Law only the monarch held allodial title, gained through grant of another sovereign or through Right of Conquest. All others were tenants of the sovereign through their feudal vassalages. The allodial system is the legal system that grants full property rights to individuals, who may enjoy fee simple ownership - full property rights subject only to governmental powers of taxation, police power, and compulsory purchase (eminent domain). The first relevant legal case in English law, the "Saltpeter Case," involved the king's need for saltpeter to make gunpowder for the army and seizure of a saltpeter mine from a private owner. The case was decided in the king's favor. The victory of the colonies in the American Revolution is considered to have converted allodial title from the king to the several states. The Fifth Amendment did not establish the right of eminent domain because this right was already inherent in the sovereign. Rather, the Fifth Amendment limited the right of eminent domain by requiring just compensation when private property is taken for public use.

Contemporary legal debates extend foundations and incorporate new angles to old views, which include the debate over what the Founding Fathers intended by public use. Similarly, the newer economic theories also meld old philosophies with new theories regarding transaction costs and land assembly. Several case studies focus on just compensation. Eminent domain is used widely as an economic development tool, which raises the issue of how broadly to define public use. Given that eminent domain is largely a legal concept, several important Supreme Court decisions warrant discussion to further uncover the complexity of eminent domain.

The Kelo Decision

In 2000, the City of New London adopted a development plan for its Fort Trumbull area, which was expected to generate 718 to 1,362 permanent jobs, increase property taxes and other revenues, and revitalize the downtown and waterfront areas of the city. A state agency had declared the city to be economically distressed in 1990. The precipitating event for the development plan was the closing of the Naval Undersea Warfare Center of the U.S. Navy in 1996, a facility that had employed 1,500 people. The New London Development Corporation (NLDC), a private, non-profit entity established by the city to assist in economic development efforts, was activated and received authorization from the State of Connecticut to issue bonds to support planning activities. In early 1998, Pfizer, Inc. announced plans to build a $300 million research facility adjacent to the Fort Trumbull site, and NLDC planners welcomed this development as a possible anchor for their project. The NLDC held a series of neighborhood meetings, and received approval from both the city and the state for a development plan for 90 acres of the Fort Trumbull area.

The Fort Trumbull area is located on a peninsula, and contains the former naval facility and 115 properties that were privately owned. The development plan includes seven parcels intended for various uses, including a waterfront commercial area, a residential area, a facility for research and development enterprises (adjacent to the Pfizer property), a marina, office buildings, retail space, and parking. Also, a portion of the former naval facility has been converted to a state park. This plan was approved in January 2000, and the city authorized NLDC to purchase property or acquire property through eminent domain. The NLDC proceeded to purchase most of the real estate in the 90-acre area. However, negotiations with some private owners broke down, so the NLDC initiated condemnation proceedings in November 2000.

Susette Kelo and other property owners brought action in the New London Superior Court in December 2000 on the grounds that the taking of their properties violated the public use clause of the Fifth Amendment. The Superior Court granted a permanent restraining order against taking of some of the parcels, but denied relief for the other parcels. The case was appealed to the Supreme Court of Connecticut, which ruled that all of the proposed takings were valid. The Court ruled that the takings were in accordance with the state's economic development statute, and that economic development is a valid public use under both the Federal and State Constitutions. Three dissenting justices would have imposed a higher standard for takings for economic development in that the city had failed to produce "clear and convincing evidence" that the economic benefits of the plan would actually be produced. These justices fell short of calling for a full cost/benefit analysis, but clearly they were moving in that direction. The U.S. Supreme Court agreed to hear the case to determine whether economic development is public use under the Fifth Amendment. Justice Stevens wrote the opinion for the Court, and Justices Kennedy, Souter, Ginsburg, and Breyer concurred. Justice O'Connor filed a dissenting opinion, with which Justices Rehnquist, Scalia, and Thomas concurred. Justice Kennedy filed a concurring opinion, and Justice Thomas filed a dissenting opinion. The Court decided in favor of the defendant and, in the end, the Kelo house is being moved from the Fort Trumbull site to another location in New London.

The majority opinion begins by noting that the Supreme Court long ago decided that public use is best interpreted as public purpose. In Strickley v. Highland Bay Gold Mining Co., 200 U.S. 527 (1906) in 1906, Justice Holmes wrote of "... the inadequacy of use by the general public as a universal test." The Court therefore examined whether the economic development plan serves a public purpose. In the Kelo decision, the Court (545 U.S. at 12) states: "For more than a century, our public use jurisprudence has wisely eschewed rigid formulas and intrusive scrutiny in favor of affording legislatures broad latitude in determining what public needs justify the use of the takings power."

As discussed below, the principal precedent is Berman v. Parker, 348 U.S. 26 (1954) in 1954, in which the Court held that a redevelopment project in Washington, DC could use eminent domain to acquire property within the project area that was not blighted. The unanimous opinion of the Court in Berman was that the redevelopment area "... must be planned as a whole." In Kelo, the Court cites the comprehensive nature of the New London economic development plan, the extensive review in accordance with State Statute, and the limited scope of their review to conclude that the public use requirement of the Fifth Amendment is satisfied.

The petitioners in Kelo argued that economic development does not satisfy the public use requirement, but the Supreme Court rejected this contention based on several precedents, including Berman. Petitioners also argued that takings for such purpose should require "reasonable certainty" of the expected benefits to the public. The Court rejected this argument by stating (545 U.S. at 17): "When the legislature's purpose is legitimate and its means not irrational, our cases make clear that empirical debates over the wisdom of takings - no less than debates over the wisdom of other kinds of socioeconomic legislation - are not to be carried out in the federal courts."

The Supreme Court concluded by noting that use of the takings power for economic development purposes is a matter for legitimate public debate, and that other states restrict the use of eminent domain. For example, California law states that the takings power for economic development projects can be used only in blighted areas. Nothing in the Court's ruling prohibits a state from placing restrictions on the takings power that go beyond the federal standard.

Justice O'Connor's strongly worded dissent has been widely cited. In her opinion, the Kelo decision in effect sanctions the use of eminent domain to transfer property from one private owner to another. Her dissent is captured well in the following (545 U.S., O'Connor, J., dissenting, at 8): "In moving away from our decisions sanctioning the condemnation of harmful property use, the Court today significantly expands the meaning of public use. It holds that the sovereign may take private property currently put to ordinary private use, and give it over for new, ordinary private use, so long as the new use is predicted to generate some secondary benefit for the public - such as increased tax revenue, more jobs, maybe even aesthetic pleasure. But nearly any lawful use of real private property can be said to generate some incidental benefit to the public. Thus, if predicted (or even guaranteed) positive side-effects are enough to render transfer from one private party to another constitutional, then the words "for public use" do not realistically exclude any takings, and thus do not exert any constraint on the eminent domain power."

She further states that the Court abdicates its responsibility in calling for the states to place appropriate restrictions on economic development takings. She worries that the impact of the Court's ruling will be to harm people with relatively few resources and benefit those with influence and power. In short, a taking for the purpose of transferring ordinary property from one private owner to other private owners for economic development purposes is unconstitutional.

The reaction in Congress to the Kelo decision was swift. Bills were introduced in both the Senate and the House to limit the use of eminent domain for economic development purposes. The bill introduced in the Senate (S. 1313, June 27, 2005) cites the dissent by Justice O'Connor, and specifies that "... public use shall not be construed to include economic development." The proposed Act would apply to all exercise of eminent domain power by the federal government and all exercises of eminent domain by state and local government through the use of federal funds. Two bills were introduced in the House. One bill (H.R. 3315, July 14, 2005) amends the Housing and Community Development Act of 1974 to prohibit the use of eminent domain by state or local government to obtain property for commercial development by private persons. The other bill (H.R. 3135, June 30, 2005) is similar to the bill introduced in the Senate by prohibiting use of eminent domain for economic development by the federal government, and by denying federal funds to state or local governments that use eminent domain for economic development. None of these bills passed, but on June 23, 2006 President Bush issued an Executive Order titled "Protecting the Property Rights of the American People." This Executive Order limits the taking of private property by the federal government (but not by state governments, of course), excluding mere advancement of the economic interests of private parties. Permissible public purposes include clear-cut public uses (roads, parks, government buildings, and so on), common carriers and utilities, and prevention or mitigation of land use that threatens public health, safety "or the environment.

Case Law: U.S. Supreme Court and State Supreme Court Decisions

There are hundreds of cases discussing various aspects of eminent domain. Attempting to cover all of them would result in a lengthy, disparate discussion of the topic at hand. This section discusses the most relevant case law applicable to the use of eminent domain as an economic development tool. At the center of the debate are three U.S. Supreme Court cases and two Michigan Supreme Court cases that preceded Kelo. The Berman case will be discussed as a primary precedent in the Kelo decision, and two additional relevant U.S. Supreme Court cases are discussed. The Michigan Supreme Court's Poletown decision and its overturning of that decision in 2004 merit mention, highlighting the same logic used to appeal the Connecticut Supreme Court's decision in the Kelo case. Finally, the recent decision of the Ohio Supreme Court in the Norwood case can be seen as a reaction to the Kelo decision. Frankel (1987) and Fischel (1995) provide histories of the evolution of eminent domain.

Two fundamental conditions that must be satisfied for eminent domain are: (1) the land is being taken for a public use and (2) just compensation must be paid for any taking. Initially, the intent of the Founding Fathers was that the public use doctrine would limit government's ability to acquire land and delegate it to a private interest. In the nineteenth and early twentieth centuries, the private interest was confined to infrastructure projects as well as mining, railroad, and utility companies, which were often viewed as quasi-governmental agencies. During the second half of the twentieth century, the definition expanded to include the transferal of land to private individuals or firms, so long as there was a clear public purpose. The Court has never invalidated a compensated taking that was rationally related to a public purpose.

Starting during the Great Depression and continuing with urban renewal in the subsequent decades, eminent domain has been used to improve underused or blighted land to alleviate poverty and decreasing property values. Public use took a back seat as private land went to private parties for redevelopment, often increasing property values and pricing previous tenants out of the market and into poorer areas. Tearing down a slum and building condominiums in its place was viewed as a public purpose because it would restore or stabilize the tax base, thus helping to alleviate poverty via the redistribution of taxes. The courts have not been any more concise on the meaning of public use, as the following cases shall show. Citing every court case involving eminent domain would be tedious, but using just a handful of cases repeatedly cited in peer-reviewed articles, legal textbooks, and books on eminent domain show the difficulty involved to determine when eminent domain is justified.

The early cases, as well as some current cases, often involve mining due to the bundle of rights involving property: surface rights, air rights, and mineral rights. Air rights focus on things built above the current built environment. You may own your house, but you do not own the airspace above your house and cannot restrict planes from flying overhead or even the possibility of a bridge being built above it. Surface rights outline what is built on the ground; it exists as a combination of zoning laws and similar regulations. Mineral rights affect what lies below the ground, such as coal, oil, water, and related minerals. These rights all come into play in many of the cases. For example, a local government may use eminent domain to obtain the surface rights, with the property owner arguing for retention of mineral rights. More recent cases focus more on development issues pertaining to surface rights rather than air and mineral rights.

In Berman, the Supreme Court began to expand the meaning of public use that was criticized by the dissenting opinions in the KeIo case over 50 years later. Washington, D.C. passed a redevelopment act in 1945 as part of an urban renewal plan. Unlike other urban cities, the U.S. Congress has an integral role in deciding all legislative issues affecting Washington, D.C. Congress declared that the use of eminent domain was necessary to take over properties that were detrimental to the health and welfare of residents. Other actions established by special committees included the development of a comprehensive plan to reduce, eliminate, and prevent blight. Conditions in the area at the center of Berman were subpar compared to other homes, but Berman owned a department store that was not blighted. A majority of the homes had outside toilets, no bathtubs, no laundry tubs, and lacked central heating. A third of the homes had no electricity. Over 97% of the people living in the area were African American.

Public use, public purpose, and public welfare, while somewhat synonymous, acquired a broad meaning based on the Berman opinion that arose again in future eminent domain cases. Justice Douglas, in writing the opinion of the court, stated that: "The concept of the public welfare is broad and inclusive. The values it represents are spiritual as well as physical, aesthetic as well as monetary. It is within the power of the legislature to determine that the community should be beautiful as well as healthy, spacious as well as clean, well-balanced as well as carefully patrolled," (348 U.S. 26, 32-33).

Eminent domain's use via the above public welfare definition covers the ongoing debate regarding whether eminent domain's ends justify its means. The vagueness of the definition leaves the idea of public use under the established public welfare guidelines problematic and requires judgments based on the merits of each individual case. The Court went further than just expanding the public use definition. Once public purpose is justified, the legislative body has the power to delegate the use of eminent domain, even if that use falls within the power of a private entity. The argument is that private enterprises may be more competent or cost-effective than governments in serving the public. Additionally, the Court defers to legislative bodies the power to determine project boundaries, size, and other needs to implement a redevelopment plan rests with the legislative, not the judicial, branch of government.

The concluding remarks in the Berman case shed more light on current redevelopment issues and strengthen the notion that courts should defer to cities in determining whether eminent domain is necessary to revitalize older areas. Tearing down only those homes or buildings explicitly exhibiting blight characteristics would lead to inefficient development by failing to incorporate future blighted structures. The Court was clear in reiterating that redevelopment is an area or neighborhood issue, not a single building or home issue. Decay was viewed as a cycle by the Court, and only tearing down areas and redeveloping those areas completely could stop this cycle. In summarizing the conclusions, the Court decided that a single landowner cannot develop a standard that supersedes the legislative body's standard. Eminent domain for redevelopment is acceptable as long as just compensation is paid for the land taken.

An eminent domain case permitted the original development of the World Trade Center. In Courtesy Sandwich Shop v. Port of New York Authority, 240 N.Y.S. 2d 1 (1963), the New York Court of Appeals upheld a state statute that authorized the Port Authority to develop the World Trade Center and a railroad terminal that would facilitate the flow of commerce. The facilitation of private enterprise was regarded as a public purpose, and the benefits to individual firms were only incidental to the public purpose.

Perhaps the most interesting case was never argued before the U.S. Supreme Court: Poletown Neighborhood Council v. Detroit, 410 Mich. 616 (1981). The facts of the case involve Detroit's attempt to use eminent domain to acquire a section of a neighborhood large enough to accommodate a General Motors manufacturing plant. The Poletown neighborhood was and still is a largely ethnic Polish neighborhood with a long tradition of community. A public purpose is met by building a factory because it provides basic jobs (as opposed to non-basic) and increases the tax base. The Michigan Supreme Court decided that public use has no single definition, but must change as society changes. Additionally, the court noted that the state legislature had passed laws enabling governmental entities to acquire property through eminent domain for commercial and industrial sites, as well as the ability to transfer these sites to private developers. The court did state that the soon-to-be displaced residents were entitled to just compensation.

The significance of Poletown occurs in its reasoning for allowing government to use its police powers for obtaining property and turning it over to developers. Conversely, it transfers the power of site control normally exercised by governments to developers. Detroit argued that new industrial development was necessary in the depressed areas to stimulate local industries and markets. Previous state and U.S. Supreme Court cases determined that speculation of what could happen otherwise on a property was not enough to warrant compensation. In this case, the Michigan Supreme Court inspected with "heightened scrutiny," and ruled that the public benefit was clear and significant in generating jobs, reducing unemployment, increasing income, and improving the overall neighborhood. Whether the factory would actually stay and the level of pollution it may contribute to the area were never questioned. The overriding public interest is that residential neighborhoods are not protected and the value of community does not trump the value of economic development where, according to the local government, reducing poverty is more important than neighborhood preservation.

This case also had two dissenting opinions worth mentioning. The first dissent stated that the government drastically exceeded its powers by failing to question whether the use was indeed public or private and that the majority failed to justify its decision based on precedents. Another issue was that General Motors picked the site and then used the government to gain access to it, rather than government selecting the site without any corporate influence. The conclusion of the first dissent is quotable in stating that: "The decision that the prospect of increased employment, tax revenue, and general economic stimulation makes a taking of private property for transfer to another private party sufficiently "public" to authorize the use of eminent domain means that there is virtually no limit to the use of condemnation to aid private businesses (Ibid)."

The importance of this dissent is still relevant as a criticism of the use of eminent domain to carry out purposes that may not be closely tied to public use. In the second dissenting opinion, the argument suggests a misapplication of the law. According to the dissenting opinion, public use is applicable to the use of eminent domain, while public purpose is applicable to taxation powers delegated to cities. The argument is that the term "public" has different connotations when applied separately. In eminent domain, the definition is narrower than in tax issues. This dissent demonstrates the difficulties of resolving conflict when the principles and terminology at the focus of the conflict are not defined clearly.

Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984) dealt with the break up of Hawaii's historic land oligopoly. While the federal and state government owned nearly half of all property, another 47% of property was owned by 72 people. Further analysis determined that 40% of the land was owned by 18 people, each of whom owned over 21,000 acres of land. The method for dismantling this oligopoly was to force involuntary land sales to minimize the federal taxes charged to the owners of the land and to enable ownership by people who previously had only the option of leasing the land. When an oligopoly exists, states may legitimately use their police powers to regulate the market.

While the Midkiff case presents a solution to the interesting topic of how to dismantle a land oligopoly, the Supreme Court strengthens the broad meaning originally discussed in the Berman case and reprimands the Court of Appeals for overstepping its powers. Justice O'Connor, in writing the opinion of the Supreme Court, says that the Berman decision did not signify that government must possess and use the property acquired in a taking. In taking the land from the private oligopoly owners and giving smaller parcels to private individuals who could not buy the land, the Court of Appeals said that a private use existed and violated the Fifth Amendment. The Court of Appeals also attempted to establish stricter scrutiny in determining whether a public use truly existed. Justice O'Connor disagreed and stated that the Court of Appeals had overstepped its powers in reversing and remanding the case.

The recent reversal of the Poletown decision provides additional insight, as well as some closure to issues left unanswered from the original case. In County of Wayne v. Hathcock, 471 Mich. 445 (2004), the Michigan Supreme Court overturned the Poletown decision. The central issue was whether Wayne County properly exercised the law in using eminent domain to condemn properties for a 1,300-acre business park that would create 30,000 jobs and over $350 million in taxes. To evaluate whether the use of eminent domain was legitimate, the court reviewed several of the eminent domain conditions based on Michigan law. The defendants argued that Wayne County did not have the proper authorization to use eminent domain and that the use of eminent domain was beyond the powers granted in the state constitution.

On the first issue of authorization, the court meticulously analyzed three conditions: (1) Was the use of eminent domain within the power of Wayne County? (2) Was the use of eminent domain necessary? and (3) Was eminent domain used for the benefit of the public? The court sided with Wayne County on all of these conditions. Authorization is apparent because Wayne County is a public corporation. Pertaining to necessity, the defendants attempted to raise the speculative nature of the project; the project had no contracts with businesses to move into the park, that several procedural issues were unresolved, which could doom the project, and that the county had not shown that the park is necessary. The court stated that the creation of jobs and ensuing tax revenue promotes prosperity and improves welfare. Despite real and existing procedural issues, the court emphasized that the land must be necessary, not that the land must be free from procedural issues. On the final issue regarding the park being necessary, the court abandoned the defendants' argument altogether on the grounds that, rather than satisfy the burden of proof that the project is not necessary, the defendants' only attempted to shift the burden of proof to the county.

The second issue of powers granted in the state constitution regarding public use was decisive. In their decision, the Michigan Supreme Court discusses public use as a term of art. Art is defined as when a legal term, such as public use, has no definitive meaning, which may lead to confusion when interpreted based on the Constitution. This discussion of art and constitutional interpretation leads to a fascinating discussion of the history of public use through Michigan case law and Michigan's 1850, 1908, and 1963 state constitutions. In understanding the evolving nature of public use, the court comes to the conclusion that the transfer of private property in this case has not satisfied the public use requirement.

The overturning of the Poletown decision is built based on the dissent from the earlier decision, which the Michigan Supreme Court cites as being the correct opinion in that case, as well as the current case. The court asserts that there are only three contexts in which the use of eminent domain is legitimate: "where 'public necessity' requires collective action, where the property remains subject to public oversight after transfer to a private entity, and where the property is selected because of 'facts of independent public significance' rather than the interests of the private entity," (Justice Young, 2004). Based on these contexts, the court demonstrates that the project does not require collective public action to arise, that the site will not be subject to any form of public oversight once sold to private enterprise, and that the public good is not explicitly served. This case demonstrated the importance of comprehensive planning for the successful use of eminent domain for economic development.

In concluding, the court asserts that Wayne County's entire case depended almost solely on the Poletown decision. The court addressed several internal conflicts with the Poletown decision, such as the earlier court's sidestepping the public use versus public purpose issue by deferring to the legislature's decision. Additionally, the economic benefits under the Poletown decision were too general to be acceptable based on the law. Taking the general economic benefit aspect a step further, the court said that such a loose interpretation of the law could support the use of eminent domain for nearly any project demonstrating even a slight economic benefit. Finally, the court tersely declares that, "... we must overrule Poletown in order to vindicate our constitution, protect the people's property rights, and preserve the legitimacy of the judicial branch as the expositor - not creator - of fundamental law" (Justice Young, 2004). Overruling Poletown restored the state constitution to its proper status in the eyes of the court.

In the recent case of Norwood v. Homey, __ Ohio St.3d __ (2006)-Ohio-3799, the Ohio Supreme Court considered the use of eminent domain for an economic development project in Norwood, Ohio. In ruling against the City of Norwood, the Court decided that economic benefit to the government and the community alone does not satisfy the public use requirement in the Ohio Constitution. Further, the Court voided for vagueness the use in the Norwood Municipal Code of "deteriorating area" as a standard for use of eminent domain powers. The term "deteriorating area" involves speculation about the condition of property in the future, not to its condition at the time of the taking. The use of the term "deteriorated area" was permitted to remain as a standard for use of eminent domain.

Case law is based on precedent, as well as interpretation. Precedent cannot logically be construed to rest on every single previous related case or courts would seldom arrive at a decision in a timely manner. Picking and choosing precedents largely depends on the characteristics of the court. While courts are supposed to be impartial, this impartiality may be clouded by the precedents used to arrive at a decision. Interpretation may also be problematic, especially regarding definitions, as highlighted by the Poletown decision. Definitions are often based on when the term was first used and are not necessarily flexible. The lack of flexibility results in the need for courts to interpret terms by reconciling the original meaning with the present conditions unless the legislature updates the definition.

Contemporary Legal Contributions to Eminent Domain

Theories regarding the use of eminent domain as an economic development tool conflict greatly as seen in the contemporary legal contributions to the eminent domain literature. While several contemporary contributions are discussed in this section, some of the contributions are not inherently related to the use of eminent domain for economic development. The purpose for including all of the contributions is to demonstrate the lack of consensus regarding eminent domain in the legal literature. With the current eminent domain reforms occurring throughout many states as of this writing, several of the following views have been considered as possible foundations to make the use of eminent domain more equitable - even though the power of eminent domain is limited by the Fifth Amendment by the requirement for payment of just compensation.

Michelman (1967) is the locus classicus for economic analysis of the more general topic of "takings" by the government. Takings include, for example, zoning ordinances (under the police power of local government) that reduce the market value of a parcel of land. The Fifth Amendment applies when the takings are for public use. He developed a broad definition of efficiency to maximize welfare. He defined the following terms:

* Net efficiency gains: excess of benefits over losses inflicted;

* Settlement costs: costs of measuring the losses inflicted plus the monetary compensation; and

* Demoralization costs: dollar value of the disutilities suffered by all who would be "demoralized" by the fact that no compensation is paid.

Compensation would be required whenever the settlement costs are less than the efficiency gained and less than demoralization costs for losing the property. But compensation is not required if net efficiency gains exceed demoralization costs and demoralization costs are less than settlement costs. Michelman (1967) thus has provided a decision rule that falls between the Pareto-superiority criterion (losers must be compensated) and the Kaldor-Hicks criterion that net efficiency gains exceed zero. Michelman is careful to highlight the fact that utility cannot be the sole purpose for a taking. Utilitarianism mixed with fairness, though, may be an acceptable modification. In addition, as the widespread negative reaction to the Kelo case suggests, "demoralization" costs may be defined more broadly and exist even when those who are forced to sell receive full monetary compensation. People feel worse off because government is seen as overstepping its "legitimate" functions.

Sax's (1971) views are somewhat environmentalist and anti-development in shifting the compensation for the taking of property to the landowner or developer instead of government. If there is some sort of environmental spillover, such as air pollution from a nearby factory or contaminated soil from a gas station, the party liable should provide compensation. Compensation would become the responsibility of the developer, not the government, leading to a slim likelihood that developers would continue to do a project and completely shoulder the financial burden. There are some hints of Coase (1960) in Sax's logic, but instead of looking at which party causes the greater harm, the developer automatically absorbs the costs of the harm. An obvious conflict with Sax is the chilling effect this form of compensation may have on developers and economic development practitioners. It would be very difficult to attract companies, knowing that the companies would be forced to carry additional costs beyond the project costs. If developers must pay for negative externalities (i.e., pollution, contamination), should they also be compensated or allowed a share of positive externalities (i.e., jobs, taxes)? By focusing on the costs of the spillovers of negative externalities, the effect of positive externalities remains unknown.

Costonis' (1975) solution would add a layer between the police powers (no compensation) and the takings clause (just compensation). This new power would be the accommodation power, resulting in a decision model in which a judge asks a series of questions and moves on to the next stage based on responses. There are several tests to determine the validity of a taking already in place. Another layer of questions may serve to make the process even more tedious and unclear. Who decides which questions to ask? Which questions are the right questions? Once the questions are figured out, then the issue becomes which answers to those questions are the right answers? The answers, like laws in general, are unlikely to be uniform due to the circumstances related to each specific case.

The Chicago School, consisting of Epstein (1985) and Frankel (1987), recommends that the police power should be used as a last resort, such as market failure and that the power of the governmental entity should be minimal. Additionally, Lockean principles, mainly that property ownership is a natural right and existed before the creation of state powers, suggest an anti-utilitarian stance. Property ownership overrides efficiency concerns, so the definition of public use is drawn narrowly. A likely criticism would stem from the change in development patterns between Locke's time in the late 1600s and the twenty-first century, with the discussion shifting from the state of nature to a state of sustainable development and fiscal solvency. Epstein (1985) also attacks Michelman (1967) and Sax (1971) for using Coase (1960) in a manner that creates additional bureaucracy. Coase has no desire to expand bureaucracy or minimize property rights; but only to use eminent domain where the market fails.

Rose-Ackerman (1992) attempts to derive a formal model with consistent rules for government acquisition of private property. The premise is that land acquisition by the government can be distinguished as a spectrum between purely public reasons to purely private reasons. Efficiency in this model has three components: private investment where the government is similar to any other player on the market, insurance for property owners or developers to hedge against a taking, and public investment based on policies and planning. Compensation is due to the landowners if the government takes their property and does not change its use, similar to a private actor paying a premium to acquire a property. If the acquisition results from a change in governmental policy or planning, then no compensation is due because the land acquisition is part of a more comprehensive plan. Investors have three possible options: (1) they can decide not to build if they believe they will not receive compensation; (2) they will build if government will use it regardless of whether the decision is efficient because they will be compensated; or (3) they will buy insurance to compensate them in case of a taking.

Peterson (1990) presents another angle to the debate hinged on morality and justice. Looking closely at Supreme Court decisions, she believes that there is a definite pattern to their decisions. Peterson's approach strays somewhat from the basic economic view and assumptions, mainly the idea of the rational consumer. While most consumers may in fact be rational, they are unlikely to think along the lines of Coase (I960) when it comes to land use decisions. People make moral judgments far more often than the rational consumer by not always including utilitarian principles in making decisions. Additionally, Peterson's approach would require courts and legislatures to balance the individual and community interests based solely on moral grounds dependent on each community. The implications of her approach may result in gridlocked courts because arguments based on morality rather than cost-benefit analysis and existing law require far more deliberation.

More recently, Heller (1998, 2008) and Heller and Hills (2008) argued that eminent domain might be used in cases that are called "tragedy of the anti-commons." In these cases, land assembly that would add to value is inhibited by fragmented ownership. Heller and Hills (2008) go beyond the current concept of eminent domain, the use of which sometimes is perceived as inequitable, as suggest the creation of "land assembly districts." The idea is to set up a district with the relevant geographic dimensions that would have a property right to approve or disapprove by majority vote a proposed assembly of land.

Several main points should be summarized. First, there is no consensus on the concept of eminent domain. There is an abundance of legal theories, but nothing that includes all angles of eminent domain or that is infallible. Despite the variety of legal theories, none of the experts in the mainstream eminent domain debate believe that eminent domain should not be used at all. Each expert attempts to craft some decision-making mechanism for the fairest, least detrimental use of eminent domain. The theories, while interesting, still fail accurately to assign responsibility and costs to parties. In theories attempting to make decision rules, the decision rules are not firm, but often depend on the merits of the cases. The need to analyze eminent domain issues on a case-by-case basis means that eminent domain theories are largely incomplete and not generalizable to all instances of eminent domain, especially when eminent domain is used as an economic development tool.

Contemporary Economic Theories of Eminent Domain

Ownership of real estate is ownership of a bundle of rights. Fee-simple ownership of the land means that property owners can use the land with few restrictions. This bundle of rights includes the right to control, dispose, and enjoy. These rights enable a property owner to buy, sell, lease, use, or do nothing with the property. This bundle of rights, though, is not inalienable. Under the allodial system, the property is still subject to a taxing authority via property taxes and the use is acceptable as long as it coincides with the zoning code and does not interfere with police powers. Furthermore, and most importantly, ownership cannot prevent eminent domain.

Superseding the role of land and associated rights are the issues of efficiency and equity. Under eminent domain there is continual conflict and interplay between equity and efficiency. Inherent in the conflict is whether the existing land use is also the optimal land use. The issue of zoning and development exacerbates the problem of efficiency because zoning codes are not constantly revised and different cities undergo development at different times. A city whose population boomed in the 1950s built homes to accommodate this population based on the housing preferences in the 1950s. Efficiency requires far more flexibility to change with the times. Unfortunately, housing and offices built in the 1950s are not adequate to meet housing and business needs in 2000. The optimal arrangement of land use would require cities to constantly update and change zoning to enable the best use of the available land. Most cities, though, are in the practice of revising their zoning laws every couple of decades or when undergoing some type of master or comprehensive plan.

The issue of equity is also problematic, especially regarding eminent domain, because eminent domain may often target older areas of cities. These older areas often suffer from structural obsolescence and other characteristics likely to be associated with blight. A majority of blighted conditions are affiliated with poverty - diverse property ownership, high vacancy rates, high crime rates, older structures, high unemployment rates, low educational attainment and similar characteristics most often associated with low-income areas. The problem with eminent domain is that equity under eminent domain occurs by displacement. By using eminent domain to acquire land, the ensuing development is assumed to make better use of the land, whether this means creating jobs, building more contemporary homes, stabilizing the tax base, or similar purposes that benefit the public. All of these aims of using eminent domain suggest that an area is acquired and torn down to create a use that will generate a better source of revenue for the entire city. It might redistribute or lessen the tax burden to more people, but at the same time, certain people are displaced. Eminent domain, therefore, may create efficiency at the expense of equity in the sense that the gains from more efficient land use are not shared with the displaced - if they receive only fair market value of their property in its existing state. Does "just compensation" mean that the gains should be shared with those who are displaced? What is justice in such situations?

One prominent economist who rejected the efficiency-equity calculus employed by mainstream economists is F.A. Hayek, who thought that the "road to serfdom" involved social planners, who try to maximize some concept of social welfare. Rather the purpose of government should be to supply public goods and to ensure personal freedom through a constitution of liberty and the rule of law rather than men. His proposal for "town planning" and use of eminent domain is interesting. He recognized that urban life is subject to market failure in the form of neighborhood effects especially negative ones. His idea was to invest some portion of property ownership in a higher planning authority. This authority would be armed only with the power of eminent domain that he called expropriation at fair market value. Hayek (1960, pp. 350-51) put it as follows: "The main practical difficulties arise from the fact that most measures of town planning will enhance the value of some individual properties and reduce that of others. If they are to be beneficial, the sum of gains must exceed the sum of losses. If an effective offsetting is to be achieved, it is necessary that both gains and losses due to a measure accrue to the planning authority, who must be able to accept the responsibility of charging the individual owners for the increase in the value of their property (even if measures causing it have been taken against the will of some of the owners) and of compensating those whose property has suffered. This can be achieved without conferring on the authority arbitrary and uncontrollable powers by giving it only the right of expropriation at fair market value."

In other words, the town's planning authority would have no budget, just the power to purchase and sell property, including the use of eminent domain. Such an authority could undertake economic development projects in which property is purchased, sites prepared, and sold to developers. But only projects in which the authority at least breaks even would be undertaken. The authority would have no "higher" social goal than breaking even in its real estate transactions and other activities.

The same year of Hayek's (1960) book is the publication date of the classic article on the problem of social cost by Coase (1960). This article expounded by example what came to be known as the "Coase Theorem." Many believe that the Coase Theorem is relevant to eminent domain. Cooter (1989, pp. 64-5), in a retrospective discussion of the Coase Theorem, states that three versions of the theorem emerged: The initial allocation of legal entitlements (e.g., rights associated with land ownership) does not matter from an efficiency perspective so long as they can be freely exchanged; the transactions costs of exchange of legal entitlements are nil, or they can be exchanged in a perfectly competitive market.

In the famous example of the spark-emitting locomotive, the railroad may have the legal right to emit sparks and cause fires (so farmers pay the railroad to reduce spark emissions), or farmers have the right to be spark free (so the railroad must control sparks or pay the farmers for permission to emit sparks). A major development in economic policy to control polluting emissions from electric power plants was the creation of a market in emission permits. This market was created by the federal government, but now emissions permits are freely exchanged in a competitive market with low transactions costs.

Does Coase (1960) apply when eminent domain is used for economic development? The facts in the Kelo case are typical. An agent for local government was attempting to assemble a large number of small land parcels so that a major project could be undertaken by private firms. This project could have been attempted by a consortium of private developers, and the right to use the land could have been obtained through private contracts. The right to use land is freely exchanged in an active market, and transactions costs are not large (but not trivial, either). However, as is discussed below, the task of assembling contiguous parcels of urban land for a large-scale development is not necessarily undertaken under conditions of perfect competition. A single buyer (or group of buyers) aims to assemble a large number of parcels that may be owned by a large number of different owners, and some (or all) of those owners can prevent the project from coming to fruition by "holding out." This problem was dubbed by Heller (1998) as the "tragedy of the anti-commons," and is discussed in detail below. Thus, the situation in the Kelo case appears not to meet the requirements of the Coase Theorem for the efficiency of private negotiations, and use of eminent domain should be considered.

The economic impact of Michelman (1967) and Sax (1971), shadowed by Coase (1960), aims not so much to determine the benefits of using eminent domain but the costs of eminent domain in terms of externalities, transaction costs, and responsible parties. The economic costs inherent in the land are as much economic as they are legal and social. The costs of environmental contamination on one property based on another person's use of another property leads to a conflict of who should be responsible and who should bear the cost. In analyzing the economic effects, the social impact, as well as possible litigation costs must be considered. Despite land often being considered a commodity, reality demonstrates that the re-arrangement of property rights is not without costs. In the end, if transaction costs are greater than the benefits to be obtained from rearranging the rights, then the rights should not be changed.

Another view of property is that of entitlement. Calabresi and Melamed (1972) developed this view in the 1970s based on Coase's (1960) argument that liability should fall on the shoulders of the cheapest cost avoider based on efficiency considerations. Basically, they set three rules regarding their analysis of property: a property rule, a liability rule, and inalienability rules. These three rules act as a hierarchy of rules for the transaction of property. The property rule establishes that property can only be taken under voluntary transaction, with the seller setting the price. If ownership via the property rule can be superseded, then the next step is whether the liability rule applies. The liability rule implies that the person who can most easily cover the costs of the transaction should be forced to pay. Inalienability occurs when exchange is not possible. Calabresi and Melamed make the assumption that property should not be protected from competitive and open markets. But, under market failure, a legal basis arises to protect property through a series of rules.

Blume, Rubinfeld, and Shapiro (1984) first raised the issue of the payment of just compensation when the developer of land knew in advance that there was some chance that the property would be acquired through eminent domain. The developer might "over develop" the property if just compensation for the taking is determined as fair market value. What if property insurance against eminent domain existed? Blume, et al. (1984), Blume and Rubinfeld (1984), and others derive a noncompensation result, concluding that compensation is merited only when the existing risk could not be minimized via private insurance. The idea of compensation aims to insure those who do not have insurance. Regulations, and the possibility of eminent domain, are likely to alter the value of the land. Insuring the property to maintain its unimpaired value would make compensation unnecessary. Since it is often impossible or too expensive to insure property, then compensation ensures that the property cannot be taken for free.

Blume and Rubinfeld (1984) also look at insurance from the investor standpoint of regulatory changes not being without costs. The authors assert that insurance often does not exist due to market failure. For them, compensation should arise from future market considerations rather than the present market. The problem with using the current market is that it often undervalues property, especially in terms of compensation. This view is worth mentioning, both because it shows the inherent issue with determining the value of the property to be compensated, as well as basing the value on speculation. The problem with speculative value is that it may overvalue the property as much as the current compensation framework undervalues property.

Fischel and Shapiro (1988) reexamined the issues raised by Michelman (1967), Blume and Rubinfeld (1984), and Blume, Rubinfeld, and Shapiro (1984) and noted that the insurance models with noncompensation results overlook demoralization costs. Fischel and Shapiro assert that, if government is based perfectly on benefit/cost principles, demoralization costs will be zero because everyone perceives that government is run impartially. In this case, compensation is never paid because net benefits are positive, and settlement costs always exceed demoralization costs. Private insurance can handle compensation. However, if government is run consistently for the benefit of the majority, the minority will suffer demoralization costs because they perceive (rightly) that they probably will never experience gains - only losses. In this case, compensation will be required in accordance with the Michelman rules. It is clear that Fischel and Shapiro think that many local governments are run for the benefit of the majority, and therefore compensation is justified. They also call for more research on the extent to which people feel differently about random losses compared to losses imposed by government in some systematic fashion.

Epstein's (1985) views coincide somewhat with Fischel and Shapiro (1988), as well as Blume and Rubinfeld (1984), focusing more on value than insurance. Similar to Blume and Rubinfeld, Epstein also believes compensation to fall short of the true value of the land. Litigation and other consequential costs such as moving should also be compensated for by government. The market standard for determining just compensation fails to account for real market values, despite their often subjective nature. Compensation based on the market should be a starting point for determining value, but it should not be the ending point; market values should be corrected to account for forcing the transaction. Despite the existence of markets for property transactions, these markets operate under free exchange. Condemned property operates under market rules that are abnormal and reduce the normal rate of return on the sale of the land - the market rules favor the buyer, not the seller. For Epstein, it is not just land value, but several values and possible future values that should guide compensation.

Based on these views, the use of, or the threat to use eminent domain is unclear and inconsistent on a case-by-case basis. The biggest reason for this lack of predictability stems from the changing nature of the judicial system. Eminent domain is a legal tool more than an economic development strategy. Depending on the economic development project, the court will use the available facts and evidence to balance not just the costs and benefits, but whether it is a legitimate use of the law. The decision-making behavior of economic development officials is largely luck; what the economic development official views as a legitimate use of eminent domain may not be viewed as legitimate in the eyes of the court, which must largely base its decisions on precedent.

If nothing else, the legal and economic literature about eminent domain reveals a variety of approaches without declaring any one approach as the best, as summarized in Exhibit 1. Because the merits of the eminent domain must be determined in each situation, the approaches outlined in the literature provide enlightenment on the central issues and themes. While there is an obvious lack of consensus, the abundance of debate continually enriches eminent domain. This enrichment, though, is often limited to theory and debate, as the peer-reviewed, quantitative literature on eminent domain exists in limited scope.

Use of Eminent Domain for Economic Development

In our view, economists have a great deal to contribute to the debate over use of eminent domain for economic development. McDonald (2006) has advocated explicit use of cost-benefit analysis as part of the decision-making process. In general, economists believe that government intervention in the economy is justified if and when the market fails to produce an efficient allocation of resources and it can be shown that intervention will lead to an improvement in efficiency. The market failure test is similar to the "but for" test that is discussed in legal and planning literatures. Conservative and liberal economists differ in their views regarding how frequently the market fails and how likely government intervention will be beneficial, but most of them agree with the general idea. In this section we present basic economic models of the urban land market to determine the conditions under which these general standards are met. The models are based on earlier work by Munch (1976), Eckart (1985), Strange (1995), Heller (1998), Buchanan and Yoon (2000), and McDonald (2001, 2006). But first it is worth noting that government intervention in the urban land market is pervasive. With the exception of Houston, all major cities in the U.S. have zoning ordinances that specify in some detail the permissible use of every parcel of land. Zoning is based upon the police power of local government to protect the health and safety of the public and the Supreme Court decision in 1926 in the case of Euclid v. Ambler Realty, 272 U.S. 365 (1926). In other words, the private market has produced an outcome that calls for regulation. Further, it is generally recognized that compensation is not required if a zoning ordinance causes a reduction in the value of an owner's land. It is also worth noting that most of the activities of local government involve the provision of public goods and services - goods and services that are publicly provided because the market would undersupply them. Those goods and services include education, hospitals and health care, transportation (streets and highways, public transportation), public safety (police, fire protection, public health), parks and recreation, community development and planning, water, sewerage, solid waste management, and other local infrastructure. In short, local government is largely in the business of addressing market failures and taking action that improves the allocation of resources.

The received economic model of eminent domain is the article by Munch (1976), who began by noting that, because of the just-compensation provision, eminent domain may be interpreted as a limitation on police power. Munch (1976, p. 475) stated that the economic efficiency argument for eminent domain stems from its advantage over the free market in assembling land under single ownership. While use of eminent domain is often not for the purpose of land assembly, the example in the Kelo case fits Munch's purpose precisely.

The Munch (1976) model is shown in Exhibit 2. Land parcels are assumed to be homogeneous, but the reservation price of the sellers in a locale varies because some sellers are not selling at the margin. The distribution of reservation prices is skewed to the right, with the current market price as the lowest reservation price. See Neutze (1987) and Evans (1999) for more detailed analysis of this phenomenon. Consequently, the supply curve of contiguous parcels of land for assembly is positively sloped, and is shown as MCa in Exhibit 2. The supply curve of scattered parcels is perfectly elastic, and shown as MC1n. Supply curve MCa is based on the assumption that the buyer will pay the reservation price to each seller, and no more. If the buyer cannot determine the reservation prices of the sellers, then MCa is the average cost of land at each quantity, and the marginal cost of land is MC h. The value of the marginal product of assembled land is assumed to be negatively sloped in the relevant range, and is shown as VMP in Exhibit 2. VMP is the long-run demand curve for land because the purpose of land assembly is to install new capital on the land. Munch (1976, p. 476) states that: "If the project has some minimum feasible size, the demand curve will be discontinuous at the corresponding number of parcels. If assembly of dispersed ownerships into one unit permits the internalization of externalities, there may be increasing returns to scale, implying an upward-sloping demand schedule over an initial range. The shape of the demand curve may affect the conclusion but not the method of analysis of the respective welfare costs of the free market and eminent domain."

We argue below that these considerations do indeed affect the conclusions. The Munch (1976) model is related to the empirical studies of urban land values by Peter Colwell and his associates. Colwell (1999) states that urban land values are subject to "plottage" and "plattage." With plottage land value, per square foot rises with the size of the parcel, while with plattage land, value per square foot declines with parcel size. Colwell's empirical studies suggest that plottage occurs with small parcels (for example, in downtown areas), while plattage is the typical result for larger parcels. The intersection of MCa and VMP in Exhibit 2 shows the efficient quantity of land assembly, assuming that resources in the rest of the economy are allocated efficiently, an assumption that is relaxed in the next section. If there is competition among sellers on alternative sites, the market for land will produce the efficient outcome. However, if perfect substitutes for some parcels do not exist, then some sellers can capture monopoly rents. In addition, a holdout problem can exist if land is assembled sequentially (as is usually the case). If some parcels have already been acquired, then the owners of the contiguous parcels have a bargaining advantage because of the high cost of the buyer's shifting to an alternative locale. If the net effect is to raise the supply curve above MCa, then the market produces an inefficiently small assemblage of land. The holdout problem is a failure of the market to be efficient.

The private market may produce an inefficient outcome, but Munch (1976) argued that the use of eminent domain may not produce an efficient allocation either. If just compensation is taken to mean market value as established by actual market transactions, then MC^sub m^ will be seen as the supply curve. The buyer will opt for the quantity at which MC^sub m^ intersects VMP, producing an assemblage of land that is inefficiently large. The welfare loss from this outcome may be larger than the welfare loss produced by the market failure. Munch (1976, p. 480) then points out that, if the court award under eminent domain is less than the seller's reservation price, the seller has an incentive to offer the buyer the amount MC^sub a^ minus MC^sub m^ to prevent the taking of the parcel. Then MC^sub a^ is the effective marginal cost of land to the buyer, and the efficient allocation is achieved. It is worth noting that the article by Munch (1976) is based on her PhD dissertation in economics at the University of Chicago, and that her dissertation committee consisted of George Stigler, Gary Becker, and Ronald Coase (Nobel Prize winners all). She concludes that, in the absence of transactions costs, the efficient allocation is achieved either with the free market or with eminent domain. However, in the presence of transactions costs, the relative efficiency of the free market and eminent domain is ambiguous.

As noted above, we shall argue that the model shown in Exhibit 2 omits critical elements that represent the reasons for land assembly - economies of scale and agglomeration economies. The idea is that the output produced on the assembled land is greater than the sum of the outputs produced by the individual parcels, and that the value of the marginal product of land may rise in the relevant range. This notion has been explored in the context of land-use zoning by McMillen and McDonald (2002). In our model, we follow Munch (1976) in assuming that the supply curve of land is positively sloped. Land parcels in a particular locale are arrayed in Exhibit 3 in order of the reservation price. Given that the land parcels are arrayed in that order, the curve representing the value of the marginal product of each parcel (when added to the assemblage) can assume many shapes, including a jagged, discontinuous function. The shape of the VMP curve depends upon the nature of the development and the exact location of each parcel in the assembled development. Munch (1976), as shown in Exhibit 2, assumed that the VMP of the parcel was negatively related to its reservation price. In Exhibit 2, the first parcel assembled has a low reservation price and a high VMP, while the last parcel added has a high reservation price and a low VMP (equal to the reservation price). Under these assumptions the buyer can start to assemble land with the marginal cost less than the value of the marginal product. A profit is made even if the buyer is able to assemble less than the efficient quantity of land. The critical feature of Exhibit 2 is that the VMP curve intersects the MC^sub a^ curve from above.

One important case of the VMP curve is shown in Exhibit 3. In Exhibit 3, the value of the marginal product of assembled land starts at the MC^sub a^ level (equal to VMP in the current use), and rises slowly and then more sharply as more land is assembled. Two cases are shown. With curve, VMP^sub a^ land assembly pays off once a sufficient quantity of land is assembled. The value of the total product of land exceeds the total cost of land when the area under the VMP^sub a^ curve exceeds the area under the MC^sub a^ curve. The efficient quantity of assembled land is found where VMP^sub a^ intersects MC^sub a^ from above. However, with curve, VMP^sub b^ land assembly does not pay enough, given its cost. The essential difference between land assembly in Exhibit 3 with VMP^sub a^, compared to land assembly in Exhibit 2, is that assembling a portion of the efficient quantity will likely mean a loss for the buyer. The first parcels that are acquired cost more than the value of their marginal products, but these parcels are acquired because subsequent acquisitions will pay off with large VMP. In effect the buyer is faced with a risky "all or nothing" proposition. Given that many things can go wrong with the private market acquisition process, buyers and their financial backers may decide to forgo the opportunity represented in Exhibit 3. The market may fail because the risk is too great. But eminent domain can eliminate, or at least substantially reduce, the risk by guaranteeing that all of the required land can be acquired at a price that does not exceed the reservation prices of the individual parcels. As Munch (1976) has shown, land assembly under eminent domain should not go beyond the point at which the reservation price at the margin equals the value of the marginal product of land.

We therefore conclude that Exhibit 3 (with VMP^sub a^) depicts market failure and a case in which the benefits of land assembly exceed its cost. This is the case in which a little land assembly is not profitable, but a larger assemblage captures either economies of scale for an individual enterprise (e.g., a large production facility) or agglomeration economies that benefit several enterprises (e.g., a shopping center). We suggest that a useful test of market failure would include an examination of whether a little land assembly is not profitable, but a much larger assemblage is profitable. This test would be coupled with an examination of whether the buyer is having extreme difficulty assembling critical parcels in the private market. In our view, the case for the use of eminent domain is considerably less compelling in the situation depicted in Exhibit 2. The buyer may not be able to achieve the efficient assemblage of land in Exhibit 2, but the buyer is not at risk of incurring a loss if the assembled land falls short of something close to the efficient quantity. Furthermore, the buyer is accumulating expected profits as land assembly proceeds, and therefore in principle has the means to continue with land acquisition. These suggestions amount to strict standards for the use of eminent domain for economic development purposes.

Eckart (1985) took the analysis of land assembly a step further by using game theory. He set up a situation in which land acquisition by the buyer is an "all or nothing" proposition, and is clearly economically efficient. The buyer makes an offer to the land owners on an all-or-nothing basis, and the owners respond with counter offers. In Eckart's model, it is quite possible that the buyer rejects the counter offers and walks away from the project. One of Eckart's results is that the counter offer will be lower if the owners collaborate on formulating that offer rather than engage in independent bargaining. A related result is that, with independent bargaining, the owner of the larger parcel of land makes a lower counter offer because that owner has a larger impact on the price of the entire parcel. The owner of a small parcel makes a high counter offer because, as the owner sees it, this action will have little effect on the total purchase price. However, if all owners are small owners, the counter offers are likely to lead to a rejection by the buyer. Eckart's approach is purely theoretical, but it shows that market failure is a likely outcome if the project is subject to indivisibility (land of several owners must be acquired or there is no project), and if land acquisition becomes a bargaining game between the buyer and the several owners (especially owners of small parcels). Eckart (1985) did not discuss eminent domain, but his model clearly provides a rationale for use of the takings power. Strange (1995) extended Eckart's model by adding a Bayesian model of the owners' beliefs about the value of the project to the buyer.

Buchanan and Yoon (2000) take a somewhat different approach to economic modeling. Their analysis of the "anti-commons" problem shows that, when several parties have the right to exclude someone from using a resource, that resource will be inefficiently underutilitzed. Their model assumes that the user of the resource will have market power, and establishes Nash equilibrium. In their model, the parties with the right to exclude users set prices, so theirs is a Bertrand-type model. The Nash equilibrium in the case of a common resource (many users with the right of no one to exclude them) results in over-utilization of the resource. A version of the EckartBuchanan-Yoon approach can be developed in reasonably simple form.

Following Eckart (1985), suppose that a potential buyer must acquire two adjacent parcels (the development is indivisible), and that he makes an offer of P* for both parcels. Under economies of scale or agglomeration economies, the value of the two parcels to the buyer is π > P*. The value of the parcels to the buyer is a random variable that is unknown to the owners. The two parcels are identical, so each owner is offered P* 12, an amount that is at least equal to the market value of each parcel if sold separately (so the allocation of the land to the buyer is clearly efficient). The parcel owners make independent counter offers. If the total of the counter offers is P*, the buyer accepts with probability 1 .0. If the total of the counter offers is greater than P*, the probability that the buyer will accept is less than 1.0, and if the total counter offer equals P the probability of acceptance is zero. Assume that the probability of acceptance by the buyer can be written as:

where P^sub 1^ and P^sub 2^ are the counter offers of owners 1 and 2.

Under Bertrand duopoly theory, each owner is assumed to formulate a counter offer by maximizing the expected value of the price received, which is written for owner 1 as:

Maximization with respect to P^sub 1^ produces:

so:

Owner 2 is identical to owner 1 , so the counter offer from owner 2 is:

The Nash equilibrium solutions are:

The sum of the counter offers is:

The sum of the counter offers must be equal to or greater than P*. If the sum of the counter offers equals P*, the buyer accepts. If the sum of the counter offers exceeds P*, the probability that the offer is accepted by the buyer is:

where 0 < p < 1 .0 is P* as a percentage of P. The probability of acceptance of the counter offers is 1.0 if p is greater than or equal to 2/3, and falls to 0.33 as p falls to zero. The buyer can guarantee acceptable counter offers by making a high initial offer of P* = 2P/3. A high initial offer requires that p (value to the buyer) be equal to or greater than P*, of course.

Following Buchanan and Yoon (2000), it can be shown readily that, with n identical owners, the sum of the counter offers (where i runs from 1 to n) is:

As n gets large, the sum of the counter offers approaches P, the total value of the parcels to the buyer and the point at which the buyer walks away from the development with certainty. The sum of the counter offers gets larger (and the probability of acceptance by the buyer falls) as the number of identical owners increases. As the number of owners becomes large, the sum of the counter offers will approach P, so the probability of acceptance by the buyer will approach zero; in particular:

This probability approaches zero as n get large provided that p < n/(n + 1); i.e., the initial offer by the buyer is small enough so that P* / P is less than nl(n + 1), which would appear to be a reasonable assumption. The probability that the buyer does not accept the counter offer is the probability that an inefficient allocation of resources occurs. Buchanan and Yoon (2000) refer to this outcome as the tragedy of the "anticommons," in which multiple parties each have the ability to exclude the buyer. Use of eminent domain can improve the allocation of resources in such cases.

Benefits and Costs of Land Assembly

Suppose now that the existence of market failure has been shown. The next task is to examine the costs and benefits of the proposed economic development project. This question has been asked and answered in McDonald (2001 ).' Assume that the economic development project involves acquisition of residential properties that will be replaced by commercial or industrial use. The potential benefits fall into three categories: land rent, local taxes in excess of the required spending on additional public services, and employment benefits. Local economic development policies have no net benefits if there is no unemployment, if users of local public goods pay taxes equal to the cost of those goods (as under the Tiebout hypothesis), and if land is already allocated to its highest and best use. In short, net benefits exist in a world with distorted markets. The annual net benefit for the community of allocating the land to industrial or commercial use in the presence of the local public sector is:

The terms are defined as follows:

R^sub m^ = The land rent for commerci al /industri al use;

R^sub n^ = The annual rent for the housing that is removed;

T^sub m^ = The net contribution of the parcel in commercial /industrial use to the local public sector;

N/L = The number of jobs created in the development project;

f = The fraction of those jobs taken by original residents of the community;

M = The local employment multiplier effect;

w+c-w* = The after-tax wage rate plus the reduction in income maintenance payments minus the after-tax reservation wage of workers who move into employment as a result of the project. This factor plays a critical role in project evaluation; and

P = The cost of the economic development program itself to the relevant unit of government.

Typically T^sub m^ is greater than zero (and the net contribution of housing is less than zero). The net (negative) tax contribution of the housing that is removed is not included because we assume that the people continue to reside in the community.

The formula in Equation 1 1 implies that a detailed cost/benefit study will be required. As noted in Endnote 1, some cost/benefit studies of the urban renewal program of the 1950s and 1960s were conducted. A preliminary study of the New London project was undertaken in McDonald (2006), with the result that the estimated benefits of the project to the state of Connecticut very likely exceed the project costs of $84 million.

Eminent Domain Case Study Literature

There is no lack of debate or hypothetical decision models in the existing literature, but there is a notable absence of comprehensive studies regarding eminent domain and related costs. Other studies look at the various methods of eminent domain legislated in different states. None of the studies is comprehensive in nature, often focusing on only one aspect of eminent domain. Several earlier studies focus on one aspect or one incidence of eminent domain, but fail to present the big picture, as will be demonstrated. The economic and legal theory section highlighted the piecemeal nature of existing eminent domain literature. The case study literature, as will be shown, is no different.

Is the lack of literature due to a lack of the use of eminent domain? The Institute for Justice (2002) published a study outlining the supposed abuse of eminent domain. This 228-page report listed a state-by-state indictment of eminent domain misuse, supporting each case via newspaper documents, court decisions, and court documents, and covering the period of 1998 to 2002. The report outlines condemnations for private benefit based on four different categories: filed condemnations, threatened condemnations, total condemnations, and development projects with private benefit condemnations. Filed condemnations are based on actual court filings. Threatened condemnations are the number of times government has authorized the use of condemnation, but which may not have been used. Total condemnations include all properties either threatened or actually condemned. The number of development projects with private benefit condemnations includes the projects that caused condemnation work to be filed or used as a threat.

This report is quite libertarian and is one of the few comprehensive sources on eminent domain across the U.S. The report is not peer-reviewed. Given the Institute for Justice's definitions and methodology, the report provides background on several recent uses of eminent domain. The report also includes takings that may be related to an economic development project, such as to provide a road for a new business park. What the report does not say is why the use of condemnation is concentrated in the Midwest, California, and Florida. By looking only on a state-by-state basis, the report does not discuss general trends across states. The state, though, seems a reasonable unit of analysis based on state legislation, In the case of where condemnation paperwork was filed, the results are also interesting. The problem of explanation continually presents itself throughout their report due to their framing of their report as a document regarding the purported abuse of power. Would it have been better for condemnation to not be used at all? What would the economic and social impact be if condemnation was not used? Are a majority of a state's cases occurring only in one or two cities? These questions remain unanswered in the report. Exhibit 4 shows the total number of condemnation cases by state as reported by the Institute for Justice. These numbers include both threats and actual filings.

In Exhibit 4, the number of condemnation cases filed and threatened show that condemnation is threatened far more than it is actually used, by a nearly 2-to-l ratio. This ratio varies widely among the top ten states (California, Florida, Kentucky, Maryland, Michigan, Missouri, New Jersey, Ohio, Pennsylvania, and Utah) using condemnation the most. These ten states represent approximately 88% of the total number of condemnation cases. Despite this concentration of cases in ten states, the Institute for Justice does not address the reasons for this concentration, often framing these states as abusing the power of eminent domain more so than the other states. On the other end of the spectrum are nine states (Alaska, Delaware, Georgia, Idaho, Montana, New Hampshire, New Mexico, South Dakota, and Wyoming) and Washington, D.C. that have no record of condemnation cases being filed or threatened. What makes these ten states different from the ten states with 88% of the condemnation cases is never explicitly mentioned. Is it the legislation in the top ten states that is more conducive to the use of eminent domain? Why does Pennsylvania have such a large number of cases filed? If the number of cases filed in Pennsylvania is removed, the ratio of instances where eminent domain was threatened to the number of instances where eminent domain papers were filed is nearly 9: 1 . On the other hand, Florida has 2,055 cases of the threat to use eminent domain, but only 61 cases where eminent domain was used. The report does not indicate clearly whether the legislation is the source for the high numbers, nor does it spend any discussion on why numbers vary extensively from state to state.

Despite the lack of answers, the report did generate a common thread for people to turn to for a comprehensive source to use as a weapon against eminent domain, which is stated in the introduction to the report. The report renewed interest in eminent domain by several property rights groups. The Institute for Justice also represented several citizens in cities undergoing eminent domain procedures. While the report does highlight several cases, it is largely illustrative and far from quantitative. More rhetoric than research is generated by the report, but its existence provides a good starting point for what the eminent domain literature lacks in the present, as well as in the past. Whereas the Institute for Justice's report is rich in information but weak in methodology, peer-reviewed studies are rich in methodology, but the information is limited and often refers to specific circumstances, cities, and policies.

Peer-Reviewed Eminent Domain Literature

Switching now to the peer-reviewed literature, McGough (1965) notes that acquisition under eminent domain has been both for private and public uses. Looking at statutes, he reveals the dichotomy between states that use administrative and judicial systems for eminent domain proceedings. If the system is administrative, a series of paperwork must be filed to obtain the property, which can be acquired immediately. If the system is judicial, it is more formal in terms of negotiating a purchase price. A property owner rejecting the offer is then sued by the condemning party. Once litigation ensues, the court must decide whether the condemning party has the power to condemn and what the appropriate compensation is. The condemning party does not get title to the property until compensation has been paid. McGough found that ten states have a mandatory jury trial in all cases, seven have a jury except where the state is the condemning party, twenty-six have the right to a jury depending on the case specifics, and four have a jury when the action is for an entity other than a municipality. The Institute for Justice's report does not focus on how these differences in statutes may influence the frequency with which eminent domain is used across states.

Hallberg and Flinchbaugh (1968) conducted the earliest available survey regarding eminent domain usage covering 157 properties (91 properties where the initial offer was contested and 66 properties accepting the initial offer) that were acquired for construction and expansion of Interstates 70, 81, and 90 in Pennsylvania. Despite pertaining to roads instead of economic development, the study provides one of the only surveys and early methodologies regarding eminent domain. They surveyed the property owners to analyze the fairness of the first offer for the property, inconveniences, recovery ratios of contested versus uncontested properties, socioeconomic levels, attitudes toward government, and several other aspects. Of the group contesting the state's offer, the largest segment believed the state's offer was unfair based on comparisons to private appraisals (21%) or in comparison to nearby properties (17%). Another 15% had no basis for their opinion, but just felt that the offer was not fair. The biggest inconvenience caused by the highway expansion was that it isolated the property. A majority of people in the contesting group also felt that government was run by self-interested politicians.

In addition to reporting the survey data, Hallberg and Flinchbaugh (1968) also used discriminant analysis to analyze the variables within the survey. An initial regression with the property as the dependent variable was run with 24 variables, which was reduced to 1 1 variables after running step-regression analyses. The 1 1 variables in the final model were all dummy variables indicating whether a property was in a certain township, if it was classified as a farm, if it was rural, if the initial offer was considered fair, if the highway reduced property values, if the person was a registered Republican, if they considered the highway an inconvenience, the number of years the person lived on the property as a dummy variable based on year intervals, acres of property before condemnation as a dummy variable based on acre intervals, if the person hired an attorney, and if the respondent was a housewife. The final model had an r-squared of 0.7817. Using the discriminant function, all of the cases were classified. Of the 157 cases, only seven of the contested cases were misclassified (i.e., Type II errors) and none of the accepted cases were misclassified, meaning that the discriminant function was 95.6% correct. This early attempt to study eminent domain, while interesting, focused more on how the property owners reacted rather than how eminent domain worked. The heavy reliance on dummy variables is also problematic, but the authors noted that regression analysis was not an acceptable method for analysis.

Munch (1976) conducted a study that involved predictive regression analysis comparing sales prices in Chicago neighborhoods that used eminent domain versus neighborhoods that did not during urban renewal. The results suggested that the property value determined the level of just compensation; more expensive properties received above market value prices, while less expensive properties received below market prices with the incorporation of court costs. Eminent domain does not necessarily ensure that fair market value is paid in land assembly. The just compensation price to market value ratio was 1.27 ($15,200 under eminent domain vs. $11,981 for the rest of the market) for the court sample and 1.45 ($17,882 vs. $12,386) for the voluntary sample. This article contains several key findings. The first is that the just compensation part of eminent domain is one of the only aspects that is quantifiable in a retrospective research design. Most quantitative peer-reviewed eminent domain case studies focus on determining whether the just compensation paid was accurate relative to market conditions. Analyzing the just compensation aspect also highlights the fact that a majority of the existing eminent domain literature is retrospective. This article is important because it was the first to look at just compensation in a quantitative manner, and it is cited often in more recent, peerreviewed articles.

Roberts (1982) discussed the issue of determining value when a project enhances existing property values. The enhancement is nothing more than an enlargement of the original area to be taken based on studies indicating a larger area than originally proposed due to a change in design. In Roberts' study, the specific reason for the change is not mentioned, either due to the hypothetical nature of the project or to maintain project anonymity. He briefly discusses the legal basis of his research by citing several circuit and appeals court decisions. Generally speaking, public projects are normally planned over long periods of time and aim to improve specific areas. Because the projects generally could not be kept confidential, much of the proposed changes become reflected in nearby property values in a Bayesian-type game framework.

The example outlined by Roberts (1982) discusses land that is prone to flooding being worth $3,000 an acre, while land out of the floodplain is worth $10,000 an acre. The original date of the project's acceptance by the governing body is November 1, 1972 with completion by November 1, 1976. The area denoted by one property was originally acquired before the project was made public and the land value reflects the lack of demand for the property because of its location in the floodplain. Two additional properties are also in the floodplain, but they are located in the enhanced project area and are acquired after the plan is made public. The problem to be dealt with is, if the original amount of land had a sale value of $3,000 an acre, should the other acres acquired after the announcement of the expansion of the project be purchased at $3,000, which would be their approximate value had they been purchased originally? The effective date of valuation is the central issue.

This purchasing problem uncovers the date of valuation issue, as well as the just compensation issue. Large projects often undergo several changes in scope and scale from the conception of the proposal to final approval. Sometimes even after the approval, several modifications are necessary. Roberts raises the issue that the courts do not really have a solution to the problem of project enhancement and date of valuation. The lack of a solution leads to an extensive amount of conflict in determining the value of additional properties needed to complete a project. Eminent domain, with its rigorous requirement for just compensation, makes it extremely difficult to deal with changes in project specifications, especially if it means that the developer must wait to gain rights of way or other issues vital to project completion.

Two years later, Harju and Clauretie (1984) revisited the issue of enhancement regarding eminent domain based on actions from court decisions and legislation. The focus was on the business owner, who was also the property owner. In the case of a business owner, just compensation should include preserving the owner's cash flows. The example they provide is a fast food restaurant with a capitalized cash flow value of $1,000,000. Assumptions include that the facility would remain functional for another 30 years, its land market value is $50,000, and the cost to replace the restaurant is $250,000. Just compensation under the law is either the land value of $50,000 or the replacement cost of $250,000 less depreciation of $150,000 since the market value must account for depreciation. The difference between the costs requires additional investment by the owner and puts the owner in a more tenuous position than he was in before the taking. Several other permutations of the possible selling assumptions demonstrate that, regardless of the offer, the owner is unlikely to be in a better position unless the facility generates an amount of revenue greater than the previous location. This article is useful in discussing the layers of issues related to just compensation, but the large number of assumptions makes the concept of just compensation even cloudier. A discussion of assumptions is enlightening, but the lack of legislated or legal rule-making makes it an extremely volatile concept.

Chalmers and Sorrells (1994) discuss two case studies using regression analysis to determine how property values should be adjusted using a sales comparison approach. The first case study involves Manhattan Beach, California when the Santa Fe Railway Company conveyed over 21 acres of land to Manhattan Beach. Despite having several comparable single-family lots in the area, the problem of redevelopment was a large issue; many people bought properties with older homes, demolished the homes, and built newer ones. This practice led to conflicting property values in using original versus new values to appraise the value of the vacant land. Use of property records indicating demolitions led to a sample of 59 sales between 1983 and 1987. The variables used in the regression include data of sale as a continuous variable, size as a fraction of one divided by the square footage, and the district the property where the property was located. The resulting model had an adjusted R-square of .949. Based on sale year, there was an average annual increase of 12% in price per square foot. Using one district as the benchmark with a mean value of $40 per square foot, two of the districts had higher values while one district had a lower value. The value of size was based on a combination of the regression coefficient and square footage. The appraiser used this formula to determine property adjustments based on sale year, size, and district. Despite the high adjusted R-square, this regression analysis raises the question of which variables truly determine value. While neighborhood and size are important, can these two factors alone account for nearly 95% of a home's value? What if the sample was 1,000 homes? Would the results be the same?

The second case study conducted by Chalmers and Sorrells (1994) examined the area affected by the expansion of State Highway M-59 in Detroit's suburbs. Commercial properties populated the study area. The sample consisted of 63 commercial properties located within a quarter of a mile of the highway that were sold prior to the announcement of the highway project. The regression variables were date of sale, size of the parcel, distance of the parcel from a local mall, the ratio between frontage on M-59 and parcel size, and a dummy variable to indicate whether the parcel was located on a corner. This model produced an adjusted R-square of .662. Parcels sold between 1980 and 1985 sold at an average of ten cents less per square foot than they did between 1977 and 1979. The regression coefficients for size showed that a parcel of less than one acre sold for $6.19 more per square foot and a parcel between 7.51 and 20 acres sold for an average of $1.50 more per square foot than a parcel over 20 acres. Properties located closer to the mall had higher coefficients than properties located further way. The frontage ratio does not produce consistent results. Corner lots sold at $1.10 per square more on average. This regression formula was used to determine value per square foot based on time with the other variables held constant based on the regression coefficients. The importance of this second case study shows that the quantitative methodologies used to analyze eminent domain are largely imperfect and still a work in progress.

Guidry and Do (1998) also use regression analysis in their study on eminent domain in eastern San Diego County, California. This study looks at 207 sales, with 1 32 sales coming via eminent domain proceedings. The variables in the model are total square footage of the home, age in years of the home, square footage of the entire lot, number of bathrooms, number of garages, and dummy variables for whether the home has a fireplace, view, and if it was sold via eminent domain. With the mean sales price of $177,615 and the eminent domain coefficient of $8,394, the study indicates that homes purchased under eminent domain sold for an average of 4.73% more than homes sold at the negotiated price. These findings reflect Munch's (1976) finding that the negotiated price is lower than the just compensation price under eminent domain.

Salassi and Breaux (2001) present a unique case in their analysis of eminent domain and valuation issues from sugarcane crops. The uniqueness of the case arises from its complexity because sugarcane has a multi-year crop cycle. Additionally, a majority of sugarcane crops are planted on rented land and buying the land requires the buyer to pay the land price to the owner, as well as the crop price to the person renting the land. The reason for the use of eminent domain is conventional; acquisition by federal or state government for public use. Regardless, the focus of their research is on the methods used to determine valuation of the crops rather than the use of eminent domain. Depending on the production phase of the sugarcane over a five-year period, the cost ranges from $71 per acre to $654 per acre, which greatly influences how to determine just compensation and market value.

In order to determine the value of the crops, Salassi and Breaux (2001) run several models. The cost approach formula uses the estimated value of sugarcane per acre in a certain month, the estimated rate of return on money invested, unrecovered planting costs in a certain month, unrecovered production costs in a certain month, and a monthly discount rate. Using the cost approach, the monthly estimated dollars per acre value of the sugarcane ranges from a low of $4 to a high of $689. The discounted cash flow approach combines planting costs with expected returns. Just compensation is more accurate because the producer does not plant with the knowledge that the property will be taken during the crop cycle. This formula uses only the unrecovered production costs in a certain month, the estimated net returns from future harvests, and the monthly discount rate. Raw sugar valued at $0.20 per pound ranges from a high of $890 per acre in its first year to a low of $99 toward the end of its third year.

The article is one of the few existing to discuss the issue of just compensation for agricultural uses. Despite the novelty of this article, it does not refer to any court decisions nor discuss which processes have been utilized by the courts. While it is important for being the only quantitative article to analyze the effect of eminent domain on agriculture, it is more interesting than indicative of the typical uses of eminent domain. This case is similar to the Harju and Clauretie (1984) example cited earlier regarding the restaurant, but more complicated due to the incorporation of agricultural values.

Clauretie, Kuhn, and Schwer (2004) test the hypothesis that government property appraisals for eminent domain proceedings are not significantly different from regular appraisals. McCarran Airport in Las Vegas, Nevada was undergoing an expansion and eminent domain was used to acquire homes in the expanded tax noise abatement area. The sample consisted of 434 properties, of which 60 were taken via eminent domain. Sales price or appraised value for just compensation was used as the dependent variable. For each group of properties, a linear and semi-log equation was included. Variables include square footage, number of rooms, number of bathrooms, presence of a fireplace, pool, and/or Jacuzzi. The type of garage based on the number of cars, whether the property had been improved, the year the property was sold or taken, and whether the home had an intercom and septic system. The adjusted R-square for the market transactions was .741 for the linear model and .76 for the semi-log model. For the eminent domain transactions, the adjusted R-square was .891 for the linear model and .901 for the semi-log model. Comparisons between the market transactions and eminent domain transactions show that the properties taken under eminent domain were over-appraised by roughly 17% at $182,275 versus $156,289 for the market transactions. As in previous studies, the just compensation value exceeds the market value.

Summary of Case Studies

The existing eminent domain literature, while interesting, fails to examine any aspect of eminent domain beyond the just compensation issue. Exhibit 5 summarizes the pertinent literature. Valuation is an important step in the eminent domain process, but the eminent domain process does not succeed or fail solely due to issues of valuation. The literature does not study the interaction between value and courts, or value and opposition. Overall, appraisals under eminent domain often exceed the fair market value. Even more vital is whether other economic alternatives were ever considered before the use of eminent domain.

Summary of the Eminent Domain Case Law and Literature

So far, the analysis of eminent domain has rested largely on either theoretical or philosophical grounds. The Institute for Justice's report, while comprehensive, has ulterior motives, mainly to prove that eminent domain is governmental abuse of power. The peer-reviewed empirical literature almost exclusively examines whether the compensation paid accurately reflects market value. The complex picture of eminent domain fails to gain clarity based on case law, especially at the level of the U.S. Supreme Court. In effect, any court must consider all aspects of eminent domain and make the best possible decision based on state statute, legal precedent, and the evidence.

While the philosophies of Locke and Rawls are interesting, it is Coase's (1960) philosophy that is most applicable to case law. Based on Coase, a trial is worth pursuing only when an agreeable arrangement between the two parties either cannot be reached (because of market failure; the holdout - tragedy of the anti-commons problem) or is too costly to arrange privately. The court process is obviously a very formal and expensive step. Transaction costs increase with the need to prepare for the case, gather further evidence, enlist the assistance of other consultants and lawyers, and (perhaps) attempt to renegotiate. The court case often leads to a zero-sum game for the property owner and government entity, where one side plays the spoiler with obvious winners and losers. The only obvious winners are the lawyers. Almost all cases involving eminent domain inherently contend a violation of due process; since eminent domain requires either an administrative or judicial court process, taking land without court action is viewed as a violation. In Coase's framework, the courts should determine whether a violation of due process exists, who has property rights, which party is wrong, whether the just compensation is just, whether the government's claim satisfies the eminent domain threshold, if the benefits outweigh the costs similar to Pareto optimality, and several other factors. At the trial stage, the legal rights from both the property owner and government are left in the hands of the courts.

Court decisions in eminent domain cases, despite precedents, may be completely different in the various jurisdictions. Courts often change far more often than laws because judges retire, are voted out, or die, but laws seldom do. When an eminent domain case does reach the court system, the courts obtain the power to influence economic activity. While it is desirable for courts to weigh properly the economic consequences of their decisions, they must also adhere to the relevant legal positions from previous courts to minimize the uncertainty about the law. Courts are not intended to operate like economists and sometimes seem oblivious of the gravity of their decisions. In the Kelo decision, essentially the Supreme Court declined to second-guess the law of the State of Connecticut and its implementation.

The complexities of eminent domain are apparent in this review of the literature. Existing analyses and court decisions provide interesting reading material, but fail to account for the big picture: how eminent domain is used as an economic tool, whether any part of eminent domain is more important than just compensation, and whether other parts of eminent domain can be quantitatively evaluated. Courts focus on deciding a case based on the evidence specific to that case. Existing analyses are also either too narrow or too broad. At the present time, the empirical studies of eminent domain are limited and narrow. Furthermore, the connection to economic development, despite the potential importance of economic development for public welfare, is unclear. Several court cases further highlight these complexities.

What is missing from the eminent domain discussion is the role of the economic development practitioner and general economic development issues. Eminent domain is not the only economic development tool available. At this point the KeIo decision informs us that the Supreme Court has chosen to be judicially conservative and defer to the state legislatures in the definition of public purpose, which can include economic development. Property rights advocates argued that the Supreme Court should have taken a judicially active stance and invalidated a portion of the Connecticut economic development statute. It seems that this debate pits one notion of conservatism against another. The extent to which the states will revise their economic development policies in light of the Kelo decision remains to be seen.

[Reference]  »  View reference page with links

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The authors thank Professor Alan Weinstein for assistance with the legal aspects of eminent domain. Thanks as well to the members of the editorial board who reviewed the paper.