Public goods, taxes, and takings

Blume, Rubinfeld, and Shapiro [Blume, L., Rubinfeld, D., & Shapiro, P. (1984). The taking of law: When should compensation be paid? Quarterly Journal of Economics, 99, 71-92] first showed that compensation for takings can lead to a moral hazard problem that results in overinvestment in land suitable for public use. To the contrary, this paper shows that when compensation is financed by a proportional property tax, the compensation rule is irrelevant regarding the level of investment landowners make in their property, as well as the amount of land they authorize the government to acquire, both of which will be efficient. Intuitively, landowners recognize the equivalence of taxes and takings in budgetary terms, causing the distortionary effects of compensation and property taxation to cancel each other out through the balanced budget condition.