This paper considers the implications associated with recent Supreme Court rulings that can be interpreted as supporting the use of eminent domain in transferring the property rights from one agent, a landowner, to another private agent, a developer. A potential benefit of the ruling is that it effectively eliminates a hold-out problem, i.e. the problem associated with potential sellers withholding their property in an attempt to obtain a larger surplus. But, when property rights are transferred via eminent domain, landowners' investments in their properties become more inefficient and the level of redevelopment may actually fall. Compared to voluntary exchange, when property rights are transferred via eminent domain, social welfare will increase only if the hold-out problem is significant; otherwise, it will fall.
Policy Discussion Paper, No. PDP 2008-2, May 2008