This paper considers the implications associated with a recent Supreme Court ruling that can be interpreted as supporting the use of eminent domain in transferring the property rights of one private agent--a landowner--to another private agent--a developer. Compared to voluntary exchange, when property rights are transferred via eminent domain, landowners’ investments in their properties become more inefficient and, as a result, any any benefit associated with mitigating the holdout problem between landowners and the developer is reduced. Social welfare can only increase if the holdout problem is significant; otherwise, social welfare will fall when property rights are transferred via eminent domain.
JEL code: C7, D61, H11, P14.
Key words: eminent domain, social welfare, property rights, holdout problem, bargaining.
Suggested citation: Nosal, Ed, 2007. "Private Takings," Federal Reserve Bank of Cleveland, Working Paper no. 07-13.