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Economic Theories of Legal Liability

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  • Robert D. Cooter
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    Abstract

    This essay synthesizes and re-conceptualizes some central results of the economic analysis of liability law and sketches the legal details that drive them. Three different legal mechanisms for creating efficient incentives are examined in turn. The first mechanism uses the legal rule of strict liability to internalize costs. The second mechanism uses a negligence standard to create and enforce efficient standards of behavior. The third mechanism uses law to channel transactions into voluntary exchange. The initial explanation of the three mechanisms makes simplifying assumptions of perfect information, solvency, costless dispute resolution, and risk neutrality, before examining the results of relaxing these assumptions. The rules of the three major bodies of liability law—property, contracts, and torts—will be analyzed as examples within these three mechanisms. Property law concerns appropriation of ownership rights or interference with them; contract law concerns broken promises; tort law concerns accidental or intentional harm to people or property.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.3.11
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 5 (1991)
    Issue (Month): 3 (Summer)
    Pages: 11-30

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    Handle: RePEc:aea:jecper:v:5:y:1991:i:3:p:11-30

    Note: DOI: 10.1257/jep.5.3.11
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    1. Cooter, Robert D & Rubinfeld, Daniel L, 1989. "Economic Analysis of Legal Disputes and Their Resolution," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1067-97, September.
    2. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 2(2), pages 279-303, Fall.
    3. Cook, Philip J & Graham, Daniel A, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 91(1), pages 143-56, February.
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    Cited by:
    1. George A. Schieren, 2007. "Economic Efficiency and Damage Awards in Personal Injury Torts," Working Papers, Department of Economics, Appalachian State University 07-08, Department of Economics, Appalachian State University.
    2. Grajzl, Peter & Baniak, Andrzej, 2009. "Industry self-regulation, subversion of public institutions, and social control of torts," International Review of Law and Economics, Elsevier, Elsevier, vol. 29(4), pages 360-374, December.
    3. Clive D. Fraser, . "On Tort as an Implicit Insurance System with State-Dependent Utility. The Case of Child Mortality Risk," Discussion Papers in Public Sector Economics 96/4, Department of Economics, University of Leicester.
    4. Schmitz, Patrick W., 2000. "On the Joint Use of Liability and Safety Regulation," MPRA Paper 12536, University Library of Munich, Germany.
    5. Pouliot, Sébastien, 2012. "On the Economics of Adulteration in Food Imports: Application to US Fish and Seafood Imports," Working Papers, Structure and Performance of Agriculture and Agri-products Industry (SPAA) 148596, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    6. Darius Lakdawalla & George Zanjani, 2002. "Insurance, Self-Protection, and the Economics of Terrorism," NBER Working Papers 9215, National Bureau of Economic Research, Inc.
    7. Stremitzer, Alexander & Tabbach, Avraham, 2009. "Insolvency and Biased Standards--The Case for Proportional Liability," Working Papers, Yale University, Department of Economics 75, Yale University, Department of Economics.
    8. Alfred Endres & Tim Friehe, 2013. "The monopolistic polluter under environmental liability law: incentives for abatement and R&D," Social Choice and Welfare, Springer, Springer, vol. 40(3), pages 753-770, March.
    9. Satish K. Jain & Rajendra P. Kundu, 2004. "Economic Efficiency, Distributive Justice and Liability Rules," Working papers 130, Centre for Development Economics, Delhi School of Economics.
    10. Cooter, Robert D., 1999. "Punitive Damages, Social Norms, and Economic Analysis," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt7h38w307, Berkeley Olin Program in Law & Economics.
    11. Rouillon, Sebastien, 2008. "Safety regulation vs. liability with heterogeneous probabilities of suit," International Review of Law and Economics, Elsevier, Elsevier, vol. 28(2), pages 133-139, June.
    12. Berglof, Erik & Claessens, Stijn, 2004. "Enforcement and Corporate Governance," Policy Research Working Paper Series 3409, The World Bank.
    13. Andreas Papatheodorou & Nikos Platis, 2007. "Airline Deregulation, Competitive Environment and Safety," Rivista di Politica Economica, SIPI Spa, SIPI Spa, vol. 97(1), pages 221-242, January-F.

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