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Risk Aversion and the Desirability of Attenuated Legal Change

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  • Steven Shavell

Abstract

This article develops two points. First, insurance against the risk of legal change is largely unavailable, primarily because of the correlated nature of the losses that legal change generates. Second, given the absence of insurance against legal change, it is generally desirable for legal change to be attenuated. Specifically, in a model of uncertainty about two different types of legal change—in regulatory standards, and in payments for harm caused—it is demonstrated that the optimal new regulatory standard is less than the conventionally efficient standard, and that the optimal new payment for harm is less than the harm.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19879.

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Date of creation: Feb 2014
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Handle: RePEc:nbr:nberwo:19879

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  1. Kaplow, Louis, 1992. " Government Relief for Risk Associated with Government Action," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 94(4), pages 525-41.
  2. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(2-3), pages 529-571, May.
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