Property versus political holdouts: the case of the TGV rail line Lyon–Budapest in Italy

The law and economics literature commonly justifies the state’s taking power on the grounds that it is necessary to overcome holdouts and, thus, allow efficient development projects to move forward (A development project is efficient when the benefit it generates exceeds its cost.). By permitting the government to take private property rights non-consensually, the taking power limits the ability of private property owners to engage in strategic bargaining with the government and puts a cap on their ability to extract payments from the government in exchange for agreeing to transfer their rights. In this paper, I will argue that the standard story is highly incomplete and, therefore, inaccurate. It conveniently ignores the ability of politically powerful groups to block development projects by exercising their de facto veto power over proposed projects. Such groups do not necessarily have rights in any properties directly affected by the project. Once these groups, whom I call “political holdouts”, are added to the analysis, it becomes clear that the payment of just compensation—or any other aspect of eminent domain law and regulatory takings jurissprudence—will not help to remove their opposition and, a fortiori, cannot guarantee efficient development. I will explore the phenomenon of “political holdouts” and analyze its causes. As I will show, political holdouts are ubiquitous. Political holdouts may arise with respect to most of what passes for public policy projects, under either the aegis of eminent domain or the government’s police power, and also with respect to non-NIMBY projects. This observation may seem counterintuitive at first. However, one should consider that efficient development projects create a surplus over which powerful interest groups compete. As should be clear, what is of interest to localities and political groups is not the overall utility of a particular development project, but rather their payoff from it. Municipalities may oppose projects that benefit them simply to increase their share of the overall surplus generated by the project. Hence, the problem I point out is significant and acute. In the remainder of this paper, I will discuss in depth how the problem of political holdouts affected the construction of a fast train line (the Lyon–Torino–Milano–Trieste–Khoper–Ljubljana–Budapest TGV line) in northern Italy. Copyright Springer Science+Business Media, LLC 2013