Efficiency and Equity in the Use of Eminent Domain, with Local Externalies

In Shapiro and Pincus (2008), we proposed a method for arriving at just compensation of private owners of urban land, in cases like Kelo v New London, in which government has plans to use eminent domain to `take' private properties, to be assembled into a single parcel for some public purpose. The required quantum of just compensation can be discovered when the public purpose is to be pursued via private use of the assembled land parcel, and when the private user can be selected through an auction of the assembled land. This paper extends the auction mechanism to include properties which lie outside the area `taken' or resumed by government, but which will be affected by the new use made of the assembled area. The auction provides an efficiency test: does the proposed change in use increase the aggregate value of the land to be resumed plus the affected properties? Local externalities are internalised through the auction. We briefly discuss the political economy of the mechanism.