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Economic Theories of Legal Liability

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  • Robert D. Cooter

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.

Suggested Citation

  • Robert D. Cooter, 1991. "Economic Theories of Legal Liability," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 11-30, Summer.
    • 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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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.3.11
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    References listed on IDEAS

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    6. 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 1067-1097, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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