Law and Economics of Eminent Domain: The Contributions of Behavioral Economics and Prospects Theory to the Definition of Just Compensation

Paulo Franco (Fundação Getulio Vargas (FGV DIREITO RIO))
Antonio Maristrello Porto (Fundação Getulio Vargas (FGV Direito Rio))
Thiago Cardoso Araújo (Fundação Getulio Vargas (FGV Direito Rio))


Eminent Domain, and its suppressive nature, is the most drastic Public intervention in private property and, as a counterpart, it necessarily presupposes the payment of a fair and prior compensation. It is not difficult to understand what a prior compensation is, but it is not easy to understand what a fair value is. The paper proposes to deepen the debate about fair compensation, invoking, for that purpose, the Economic Analysis of Law and the economics of expropriations as a background. In a scenario of high transaction costs, as is generally the case with eminent domain, compensation is the appropriate legal remedy for allocating legal and economic property rights. However, this allocation is only truly efficient when there is fair compensation. The greater intensity with which losses are felt compared to gains and the suppression of the bargaining power of private owners, since, in an expropriation, there are no willing sellers, must be properly calculated for the purposes of justice and efficiency of compensation in eminent domain, mediation and, more precisely, arbitration are the legal mechanisms capable of reducing transaction costs in order to quantify the equation of the fair value of a public expropriation.

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