Courts, legislatures, and evolving property rules: Lessons from eminent domain

This paper examines judicial and legislative modifications to a specific property rule, the benefit offset, which was widely employed by railroad companies during the 19th century as a way to reduce required compensation for land taken through eminent domain. At the beginning of the railroad boom, all states allowed the benefit offset; by the end of the boom, most states had banned it, some via court decisions, others via legislation. Consistent with a simple model in which a court and a legislature act as (imperfect) agents of the public: 1) challenges to the benefit offset generally began with litigation; 2) all states that litigated the offset eventually restricted it, but not always through litigation; 3) where courts chose to allow the offset, legislation restricted it, often with substantial lags; 4) those lags tended to be longer (i.e., more time passed between litigation and subsequent legislation) when the litigation efforts took place early in the track building process (at which time the offset was more likely to be socially valuable); 5) states that never banned the benefit offset were those where landowners were unlikely to have ever been harmed by the practice (principally western states with vast expanses of public and private land). The model and historical evidence illustrate how a system that grants both the court and the legislature the power to alter property rules can establish a beneficial redundancy that increases the value of modifiable property rules.