Fair and Efficient Compensation for Taking Property under Uncertainty T. Nicolaus Tideman * Department of Economics, Virginia Polytechnic Institute and State University Blacksburg, VA 24061, USA ntideman@vt.edu Florenz Plassmann Department of Economics, SUNY Binghamton Binghamton, NY 13902-6000, USA fplass@binghamton.edu This version: February 7, 2003 Abstract: If there is uncertainty about whether a government will take property under eminent domain and investment is variable in the period of uncertainty, then compensation equal to the full value of property when taken provides an incentive for property owners to overinvest, so efficiency requires compensation that is independent of investment. However, if, as has been proposed, compensation is based on announced probabilities of takings, then governments have incentives to announce inaccurately high probabilities of takings and thereby reduce the payments they must make to owners. We argue that the announcement of a possibility of a taking should be regarded as a taking when this implies that some further investments will not be compensated, and that it is both fair and efficient to require governments to compensate owners for losses in asset value due to such announcements. Unlike previous proposals, our proposed takings mechanism provides incentives for both efficient investment and efficient takings, while paying neither more nor less than full compensation for expected losses under efficient behavior. Journal of Economic Literature Classification Code: K11 Keywords: Takings, Compensation * Nicolaus Tideman is indebted to the Wincott Foundation for summer support at the University of Buckingham and to the American Institute for Economic Research for sabbatical support. We thank Ron Britto for helpful comments on an earlier draft.