Irreversible development and eminent domain: Compensation rules, land use and efficiency

This paper examines the efficiency of eminent domain used to acquire green spaces, situations in which private investment permanently destroys the ecological externality value of land. The real option approach takes into account this irreversibility and changes established conclusions for the reversible investment case. Under irreversibility, eminent domain efficiency is more sensitive to compensation rules than previously thought. Setting compensation equal to what market value would be in the absence of eminent domain—the approach taken in the US and many other countries—reduces efficiency relative to losing the ecological externality to private development. Compensating at the market value under eminent domain threat increases efficiency, but not as much as compensation at social value does.