Compulsory Land Acquisition: Bargaining and Litigation over Compensation

Transcription

1 Compulsory Land Acquisition: Bargaining and Litigation over Compensation Ram Singh January 11, 2013 Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

2 Outline 1 Eminent Domain Laws 2 Proposed Acquisition Law 3 Claims 4 Model Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

3 Eminent Domain Eminent Domain Laws 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. Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

4 Eminent Domain Laws 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 Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

5 Eminent Domain Laws 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); Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

6 Eminent Domain Laws 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. Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

7 Eminent Domain Laws 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." Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

8 Eminent Domain Laws 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, a 7, 000 parcel receive about 5, 000, a 13, 000 property breaks even and a 40, 000 property may get two or three times its market value." Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

9 Eminent Domain Laws 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? Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

10 Eminent Domain Laws 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 litigation attributes 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). Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

11 Proposed Acquisition Law 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 plus solatium (100 percent) Multiplier: 1-2 time of market value Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

12 Proposed Acquisition Law The 80 percent Rule: Less Land for Urbanization? Presumed Obstacles: Hold-outs Real Impediments: Poor Land Records Change in Land Use Rules Construction permits Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

13 Proposed Acquisition Law 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 percent of market value Sale-deed rates Less than market; percent of actual transaction price Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

14 Proposed Acquisition Law 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 Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

15 Our Model Claims 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 Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

16 Initial Compensation I Model Consider a property: Let S the size, say in square meters r m is the per-unit market rate of the reference property, say per-square-meter. V m the market value. Clearly, V m = r m S Compensation is offered at t = 0; ˆr be the compensation rate offered by the government. So, the total compensation offered to the owner is ˆr S. Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

17 Court Technology I Model 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 at t = 1. However, at t = 0 there is uncertainty as to whether r will be greater than ˆr or not. So, r is a random variable distributed, say over [r, r], where r 0 < r. F (r x, y) is the conditional distribution function for r. f (r x, y) is the associated conditional density function, where Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

18 Court Technology II Model Let 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, ). E(r x, y) = 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 in y 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 with y, but decrease with x. Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

19 Court Technology III Model We assume F (r x, y) is such that 1 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., 2 E(r x, y) x 2 > 0, and 2 E(r x, y) y 2 < 0. Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

20 Court Technology IV Model At litigation stage, when it comes to choice of efforts, Parties play Nash Equilibrium For any given x opted by the govt lawyer, the plaintiff s problem is to choose y to solve: max y { S max y r r rf (r x, y)dr y 2 {SE(r x, y) y 2 2 y 0 2 y 0 } }, i.e., (4.1) Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

21 Court Technology V Model for given y opted by the plaintiff, the defendant, i.e., govt lawyer solves: where min x {λ [SE(r x, y) + x 0 ] + x 2 2 }, (4.2) λ is 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: Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22

22 Court Technology VI Model otherwise, x (y) = x. E(r x, y) S = y. (4.3) y E(r x, y) λs = x, if x (y) > x; (4.4) x y = y (S, x). x = x (S, λ, y) 1 If you assume that F(r x, y) satisfies first order dominance w.r.t. y you will get E(r x,y) < 0, etc. x Ram Singh (DSE) Compulsory Land Acquisition January 11, / 22