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The Core of Pure Economic Loss

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  • Guiseppe Dari-Mattiacci

    ()
    (ACLE, Universiteit van Amsterdam, and George Mason University, Arlington, Virginia, USA)

  • Hans-Bernd Schäfer

    ()
    (Hamburg University, Hamburg, Germany; and George Mason University, USA)

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.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 06-068/1.

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Date of creation: 09 Aug 2006
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Handle: RePEc:dgr:uvatin:20060068

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Web page: http://www.tinbergen.nl

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Keywords: economic loss; financial loss; tort; damage; compensation;

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References

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  1. Goldberg, Victor P, 1994. "Recovery for Economic Loss following the Exxon Valdez Oil Spill," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 1-39, January.
  2. Goldberg, Victor P, 1991. "Recovery for Pure Economic Loss in Tort: Another Look at Robins Dry Dock v. Flint," The Journal of Legal Studies, University of Chicago Press, vol. 20(2), pages 249-75, June.
  3. Peter A. Diamond, 1974. "Single Activity Accidents," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 107-164, January.
  4. Goldberg, Victor P, 1988. "Accountable Accountants: Is Third-Party Liability Necessary?," The Journal of Legal Studies, University of Chicago Press, vol. 17(2), pages 295-312, June.
  5. Giuseppe Dari Mattiacci, . "The Economics Of Pure Economic Loss And The Internalisation Of Multiple Externalities," German Working Papers in Law and Economics 2003-1-1053, Berkeley Electronic Press.
  6. Ralf Ewert, 1999. "Auditor Liability and the Precision of Auditing Standards," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 181-, March.
  7. Gilead, Israel, 1997. "Tort law and internalization: The gap between private loss and social cost," International Review of Law and Economics, Elsevier, vol. 17(4), pages 589-608, December.
  8. Craswell, Richard & Calfee, John E, 1986. "Deterrence and Uncertain Legal Standards," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 279-303, Fall.
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Cited by:
  1. Schaefer, Hans-Bernd & Mueller-Langer, Frank, 2008. "Strict liability versus negligence," MPRA Paper 40195, University Library of Munich, Germany.
  2. 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.

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