Saturday, November 14, 2009

Replace Eminent Domain

Let me preface this post by saying that the following ideas are not well thought through. This is my attempt at a creative solution to some of the problems of eminent domain, and I rely on you, dear reader, to help me see where I'm going wrong.

The use of eminent domain is justified by the argument that it is a practical necessity for the completion of certain kinds of land-intensive projects with value to the larger community. It is commonly used in highway construction projects, rezoning, and urban renewal.

Problems with eminent domain include that it can be abusive (especially due to ties between would-be developers and local government), that it is conceptually incompatible with property rights, that it introduces regime uncertainty, and that because it doesn't rely on market clearing prices (it doesn't have to because it is coercive) it is virtually guaranteed that there will be a mismatch between what is paid to a property owner whose land is condemned and the value of the land to that owner.

I have a pretty strong bias toward market solutions for problems, and so while thinking about eminent domain I wondered whether the concept of property rights can be reformulated in a way that makes eminent domain obsolete. Any such reformulation should accomplish two objectives:

1) It should use prices to clear the market. This matters because voluntary transactions that rely on the price mechanism (as opposed to coercive methods like eminent domain) guarantee that wealth is being created, not destroyed, by the accomplishment of the transaction. It also removes politicking and power from the equation.

2) It should eliminate the 'hold out' problem. The hold out problem is a problem of monopoly power - power held by property owners because their individual plots are EACH uniquely valuable to the project (whatever the project is - say a road building project). Hold outs are engaging in rent seeking behavior at a cost to everyone else in the community who could benefit from the project.

I propose that property rights could be reformulated along lines similar to partner ownership of a firm. Instead of individual, singly owned plots being the basis for property ownership, entire neighborhoods could be owned jointly with individual plots standing in for discrete shares. In this model, buying a house would be better characterized as becoming a partner in a neighborhood. Neighborhoods could be administered by professional managers, by committees,  by elected representatives, or by whatever other means seemed right to the neighborhood partners.

In a world where property rights were so formulated, eminent domain may be considerably less necessary. Rather than needing to negotiate individually with plot owners, it would only be necessary to negotiate with the managers of each neighborhood. Neighborhoods may desire to compete for the 'business' of selling rights-of-way through their boundaries, or to attract value-enhancing development.

To most hobby economists (and real economists) it should be pretty obvious where I'm going with this. It's a pretty comprehensive change to the concept of real property ownership, and I'm sure it has problems, unintended consequences, and unrecognized complexities. I'd appreciate it if you'd take a few minutes to point them out to me!

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