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The Core Of Pure Economic Loss

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  • Giuseppe Dari-Mattiacci
  • Hans-Bernd Schäfer

    (University of Hamburg, Germany)

Abstract

Should loss of earnings be compensated? The established law and economics wisdom considers pure economic loss as a transfer of wealth from the victim to a third party, whose earnings increase as a consequence of the accident. Such transfers do not amount to a social loss and, hence, should not be compensated. We revisit these arguments and show that the social loss should be calculated by taking into account that: (a) pure economic loss often involves impairment costs resulting from the fact that valuable resources cannot be temporarily used; and (b) the third-party earnings come at the cost of increased capacity. This increased capacity mitigates the expected harm and, hence, is a form of precaution. By taking into account these factors, we show that most pure economic loss cases do result in a socially relevant loss. In addition, we argue that the absence of a social loss is a necessary, but not sufficient, condition for the denial of compensation. The victim (or a third party) may have actually paid for protection against purely private losses. Thus, compensation should be awarded irrespective of whether national law treats the case under tort or contract (where compensation is undisputed). Finally, we offer considerations on the optimal design of liability rules.

Suggested Citation

  • Giuseppe Dari-Mattiacci & Hans-Bernd Schäfer, "undated". "The Core Of Pure Economic Loss," German Working Papers in Law and Economics 2005-1-1124, Berkeley Electronic Press.
  • Handle: RePEc:bep:dewple:2005-1-1124
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    File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1124&context=gwp
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    References listed on IDEAS

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    2. Dari-Mattiacci, Giuseppe & Schafer, Hans-Bernd, 2007. "The core of pure economic loss," International Review of Law and Economics, Elsevier, vol. 27(1), pages 8-28, March.
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    Cited by:

    1. Anthony Niblett & Richard A. Posner & Andrei Shleifer, 2010. "The Evolution of a Legal Rule," The Journal of Legal Studies, University of Chicago Press, vol. 39(2), pages 325-358.
    2. Hans-Bernd Schäfer & Frank Müller-Langer, 2009. "Strict Liability versus Negligence," Chapters, in: Michael Faure (ed.), Tort Law and Economics, chapter 1, Edward Elgar Publishing.
    3. Eberhard Feess, 2013. "Negligence standards and care levels when damages depend on sales prices," European Journal of Law and Economics, Springer, vol. 36(2), pages 389-405, October.
    4. Dari-Mattiacci, Giuseppe & Schafer, Hans-Bernd, 2007. "The core of pure economic loss," International Review of Law and Economics, Elsevier, vol. 27(1), pages 8-28, March.

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    More about this item

    Keywords

    economic loss; financial loss; tort; damage; compensation;
    All these keywords.

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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