Compulsory Land Acquisition: Bargaining and Litigation over Compensation

Compulsory Land Acquisition: Bargaining and Litigation over Compensation

Ram Singh

January 11, 2013

Outline

1 Eminent Domain Laws

2 Proposed Acquisition Law

3 Claims

4 Model

Eminent Domain

Eminent Domain Laws

Empower the ’Government’ and its agencies to compulsorily acquire private property for public purpose.

Entitle the owner to compensation equal to the ‘market value’ of the property

Allow the owner to litigate the compensation amount, if not satisfied with the compensation offered by the government.

In practice

Acquiring department assesses market value and offers it to the owner.

The market value is assessed based on pre-determined rates; or, by using ‘similar’ properties that have been transacted through voluntary exchanges.

The owner can accept or reject the offer.

Disputes and Litigation against Compulsory Acquisition

Litigation against acquisition per-se is endemic

Litigation over compensation is a nation wide phenomenon in India

There is suggestive evidence that relatively high value property owners litigate more frequently

Litigation over compensation is common in other countries as well

Actual Compensation: Regressive I

Researchers have assessed market value by using Hedonic Pricing Models.

Empirical Findings:

The actual compensation: is different from their ‘market value’. Burger and Rohan (1967), Bell and Parchomovsky (2007), Aycock and Black (2008), and Kades (2008).;

The differences between the compensation received, on one hand, and the market price, on the other hand, is significantly large, especially for very low and very high value properties, Munch (1976) and Chang (2008);

Actual Compensation: Regressive II

Compensation for high-value properties is much greater than their market value;

Compensation for the low-value properties is significantly less than the market value.

Compensation pattern is regressive for govt. as well as judicial awards.

Actual Compensation: Regressive III

For New York City, Chang (2008) concludes:

“47 out of 89 condemnees (or 53 percent) were compensated with less than fair market value; 36 condemnees (40 percent) received more than fair market value; 6 condemnees (7 percent) got roughly fair market value. Furthermore,

“compensation percentage” (actual compensation divided by the estimated fair market value) is not bell-shaped; 36 condemnees (40 percent) received extreme compensation payments - compensations that are higher than 150 percent or lower than 50 percent of fair market value."

;

Actual Compensation: Regressive IV

A study of 798 properties in Chicago by Munch (1976) concludes:

“low-valued properties receive less than market value and high-valued properties receive more than market value," and “ [a]s a rough approximation, a7,000parcel receive about 5,000, a13,000property breaks even and a40,000property may get two or three times its market value."

Issues/Questions addressed

Why compensation awards deviate from market value?

Why the deviations b/w compensation and the market value are especially large, for the very low and very high value properties?

Why the compensation under eminent domain laws is regressive, regardless of whether the compensation is received by accepting the official offer or through litigation?

In case of India, why Court awards are higher than government awards?

Why there is rampant litigation over compensation amount?

Can the new land acquisition bill reduce litigation?

The Existing Explanations

The Existing Literature:

The ignorance of low-valued property owners (Chang, 2008)

Poor quality of government lawyers (Munch 1976; and Bell and Parchomovsky, 2007); Owners of high value properties expect to win against poor quality govt lawyers

Different precedent values of court awards (Posner, 2003); courts are more careful/conservative while adjudicating low value property disputes

The literature on litigationattributes the existence of, in equilibrium, litigation to different beliefs about litigation outcome or asymmetric information between the parties parties involved. Bebchuk (1984), Schweizer (1989), Spier (1992) and Shavell (2004).

Proposed Acquisition Law: Major Changes

Existing Eminent Domain Law:

Land can be acquired for public as well as private projects, without consent of property owners

The compensation is 1.3 times the ‘market value’; ‘market value’plus solatium (30 percent of market value)

Proposed Law:

Land can be acquired for private projects, only if 80 percent of affected owners give consent

The compensation is 2-4 times of ‘market value’:

‘market value’

plussolatium (100 percent) Multiplier: 1-2 time of market value

The 80 percent Rule: Less Land for Urbanization?

Presumed Obstacles:

Hold-outs Real Impediments:

Poor Land Records

Change in Land Use Rules Construction permits

Proposed Compensation Rule: Costlier Land?

When Eminent Domain is used,

Govt. assesses ‘market value’ and offers it to the owner.

Market value is assessed on the basis of ‘similar’ properties that have been transacted through voluntary exchanges.

The owner can accept or reject the offer.

In India, ‘Market Value’ is determined on the basis of Circle-Rates/ Registry-rates

Below market

Not updated regularly

20-50 percent of market value Sale-deed rates

Less than market; 30-60 percent of actual transaction price

Will the New Compensation Law Make Land Costlier?

Costs of Acquisition:

Compensation paid at the time of acquisition Compensation paid after litigation

Interest payments Litigation costs

Our Model

Explains the above-mentioned empirical findings

Shows that even impartial Courts produce regressive outcomes - in favour of high-value property owners

Shows that the proposed law can further intensify the litigation.

Argues that there are three main factors behind the observed outcomes:

The incentive structure for the award makers and government lawyers

The incentive structure for the owners

Initial Compensation I

Consider a property: Let

Sthe size, say in square meters

r^mis the per-unit market rate of the reference property, say per-square-meter.

V^mthe market value. Clearly,

V^m=r^m×S

Compensation is offered att =0;

ˆr be the compensation rate offered by the government. So, the total compensation offered to the owner is

ˆr×S.

Court Technology I

Let,

r denote the compensation rate awarded by the court/jury.

So, if there is litigation, the final compensation received by the owner is r×S.

Litigation (if opted) takes place att=1.

However, att =0

there is uncertainty as to whetherr will be greater thanˆr or not.

So,r is a random variable distributed, say over[r,¯r], wherer ≤0<¯r.

F(r |x,y)is the conditional distribution function forr.

f(r |x,y)is the associated conditional density function, where

Court Technology II

x is the litigation effort put in by the defendant, i.e., government lawyers;

x ∈[x,∞)

y is the litigation effort put in by the lawyer of the litigant owner;

y ∈[0,∞).

Let

E(r |x,y) = Z ^¯r

r

rf(r |x,y)dr.

That is,E(r |x,y)is the expected compensation rate, per-square meter, awarded by the court.

Note that the land-owner/his lawyer put iny in order to get higher

compensation. In contrast, the govt lawyers is expected argue against any increase in compensation. So, plausibly the expected value of the

compensation rate awarded by court, i.e.,E(r |x,y)should increase withy, but decrease withx.

Court Technology III

We assumeF(r |x,y)is such that¹

∂E(r |x,y)

∂y >0 and ∂E(r |x,y)

∂x <0.

Further, assume that for each party, the marginal gains from effort decrease as effort level increases, i.e.,

∂²E(r|x,y)

∂x² >0, and ∂²E(r |x,y)

∂y² <0.

Court Technology IV

At litigation stage, when it comes to choice of efforts, Parties play Nash Equilibrium

For any givenx opted by the govt lawyer, the plaintiff’s problem is to choosey to solve:

maxy

( S

Z ¯r

r

rf(r |x,y)dr−y² 2 −y0

) ,i.e.,

maxy

SE(r |x,y)−y² 2 −y0

(4.1)

Court Technology V

for giveny opted by the plaintiff, the defendant, i.e., govt lawyer solves:

minx

λ[SE(r |x,y) +x0] +x² 2

, (4.2)

where

λis the weight put by the govt lawyer on the costs of cost of compensation to the exchequer.

The solution(x^∗(y),y^∗(x))is identified by the following first order conditions:

Court Technology VI

S∂E(r |x,y)

∂y =y. (4.3)

−λS∂E(r|x,y)

∂x =x, ifx^∗(y)>x; (4.4) otherwise,x^∗(y) =x.

y^∗=y^∗(S,x).

x^∗=x^∗(S, λ,y)

1If you assume thatF(r |x,y)satisfies first order dominance w.r.t.yyou