Great Economic Analysis of Kelo and Takings

I am weeks late finding this article, but Todd Zywicki at Volokh posts what may be the definitive economic analysis of Kelo.  He talks about not only the issue of subjective value that leaves homeowners undercompensated for the taking, but about the deceitful game local governments are playing:

Second, focusing on the holdout problem in the Kelo context is to focus on
the wrong issue. The scenario here is different from when a government wants to
build a school or post office, traditional public use purposes. Schools and post
offices have to go in a particular geographic area (that's why they are being
built), and thus strategic bargaining may be plausible because it is similar to
a bilateral monopoly situation. The small group of landowners in the relevant
area can act strategically and try to extract a high price for its sale.

In Kelo, however, there is no obvious holdout power because Pfizer could put
its building in any city in America. So its not like a neighborhood school,
road, or post office. In Kelo, the holdout power is created artificially
by the city's desire to give Pfizer a sweetheart deal to bring it to town.

So ex ante, there is no viable holdout power in this situation because
there are an infinite number of close substitute sites for the building. The
building is going to be built somewhere, the only question is what city--New
London, Hartford, Bridgeport, Boston, New York, Chicago, etc. The artificial
scarcity that says the building has to be built in New London was created by the
city's other subsidies to attract Pfizer to town (the obscenely low rent,

So if one is truly concerned about the holdout power problem, then the
correct solution is to require the city to eliminate the artificial scarcity
that "requires" the building to be built in New London rather than some other
city, the same way that a new school would have to be built in New London. If we
allow both the subsidies and the Taking for the benefit of the private party, we
are allowing the distribution tail of what city the Pfizer headquarters will be
built to wag the efficiency dog of whether the homeowner is holding out versus
having subjective value. Instead, we want to have the parties bargain ex ante
before they finally select the city--i.e., choose the city and the plot of
land at the same time--not bargain ex post after the city is selected.
Forcing an ex ante bargain when there are still many substitutes for the
proposed site would eliminate the holdout problem and allow us to determine the
extent of parties' subjective value, because the negotiations would be conducted
against the backdrop of a competitive market, rather than a bilateral monopoly.
The bilateral monopoly is thrust upon the city in the road or post office
scenario; it is freely-chosen in the Kelo situation.

Instead, the ruling in Kelo enables the worst possible economic
outcome--it permits cities to create artificial scarcity just to get a larger
piece of a stable-sized pie (getting Pfizer to New London rather than Hartford),
while then permitting cities on the back end to take land from private
landowners who may or may not be losing subjective value and being
undercompensated in the process.

And the incentive effect of Kelo is obvious--it now enables corporations to
extract both subsidies and takings as the price for locating in city A rather
than city B.

I have written about my frustrations with local governments subsidizing business relocations here and here.

One Comment

  1. gary lammert:

    As of 9 August 2005, the growth fractals for the composite American equities, which represent the sizeable fraction of global equity worth, has - with reasonable probability - been completed with respect to a maximal valuation secondary to the highs of March 2000. Telltale at this near global US equity summit point is the very contrasting new 35 year low for venerable Delta Airlines which closed Tuesday below 2 for the first time in 3 and 1/2 decades, down over 94 percent from its high of over 70, 5 years ago.

    Bank stocks are sinking, having received and continuing to receive broadsides from both the Fed's increasing interest rates and the narrowing short term-long term spreads. The interest rate dependent real estate stocks, e.g., HGX, are breaking lower trend lines. It is over.

    The final blow-off for the Nikkei and Euro stocks very likely occurred today with exhaustion gaps to yet another multiyear high. The Euro equity finale is contained in the third fractal of the 12/31/31 day sequence. The last 31 day sequence, which parallels US equity composites:

    6/15/10 to the top (a Fibonacci number 1.6 x the base of 6) with today day 15 of 15 for a terminal sequence of 6/15/15 days.

    An averaged Fibonacci growth sequence dating from August 2004 was completed today for the US equities at a lower short term high. Market sentiment is, by contrarian standards, appropriately at its most optimistic apogee. Fractally, contained within the valuation summits, the great American equity market composites have already provided evidence of a primary decay pattern. Expect the unexpected. Expect nonlinearity.

    -Gary Lammert "