Optimal Compensation for Regulatory Takings

I develop a model in which there are two groups in society, one of which bears all the costs of a regulation that provides (potentially unequal) benefits to both groups. Absent compensation, a biased government will not choose the efficient level of regulation. If taxes are nondistorting, a compensation rule can be designed to achieve the first best outcome. The optimal rule always involves a positive degree of compensation regardless of the direction of the government bias. When taxes are distortionary, the first best outcome cannot be achieved, and the optimal level of compensation may be zero. Copyright 2011, Oxford University Press.