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Class action and financial markets: Insights from law and economics

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  • Ramello, Giovanni B.

    ()

  • Porrini, Donatella

Abstract

According to the law and economics approach, pure economic loss is a private loss that is not socially relevant but simply implies a redistribution of wealth. Consequently, wrongful behavior that induces reallocation of costs and benefits with no consequences on social welfare is not considered socially harmful, so is not necessarily subject to compensation. Since pure economic loss is very often financial, the above reasoning also applies to financial markets. However, the same law and economics arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of class actions can be more far-sighted than simply compensating the victims: the liability system has the particular feature of producing deterrence and driving the market towards an efficient outcome. In this vein, the paper argues that class action intended as a complementary ex-post regulatory device can play a significant role in addressing a failure that ex-ante regulation has not. This is coherent with the law and economics tradition that interprets tort law remedies as a solution for internalizing externality and providing the correct incentive to the markets.

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File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/ramello166.pdf
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Bibliographic Info

Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 143.

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Length: 31 pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:uca:ucapdv:143

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Web page: http://polis.unipmn.it

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Keywords: class action; pure economic loss; regulation; liability; deterrence;

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References

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  1. Alberto Cassone & Giovanni B. Ramello, 2011. "The Simple Economics of Class Action: Private Provision of Club and Public Goods," ICER Working Papers 06-2011, ICER - International Centre for Economic Research.
  2. Alexander Dyck & Adair Morse & Luigi Zingales, 2010. "Who Blows the Whistle on Corporate Fraud?," Journal of Finance, American Finance Association, vol. 65(6), pages 2213-2253, December.
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  10. Alon Klement, 2004. "Incentive Structures for Class Action Lawyers," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 102-124, April.
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  17. Antony W. Dnes, 2005. "Enron, corporate governance and deterrence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(7), pages 421-429.
  18. Haymond, Jeffrey & West, James E, 2003. " Class Action Extraction?," Public Choice, Springer, vol. 116(1-2), pages 91-108, July.
  19. Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
  20. Valimaki, Mikko, 2010. "Introducing Class Actions in Finland: an Example of Lawmaking without Economic Analysis," POLIS Working Papers 152, Institute of Public Policy and Public Choice - POLIS.
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  22. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
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Cited by:
  1. Alberto Cassone & Giovanni B. Ramello, 2011. "The Simple Economics of Class Action: Private Provision of Club and Public Goods," ICER Working Papers 06-2011, ICER - International Centre for Economic Research.
  2. Ramello, Giovanni B., 2012. "Aggregate litigation and regulatory innovation: Another view of judicial efficiency," International Review of Law and Economics, Elsevier, vol. 32(1), pages 63-71.
  3. Juergen Backhaus & Alberto Cassone & Giovanni Ramello, 2011. "The law and economics of class actions," European Journal of Law and Economics, Springer, vol. 32(2), pages 165-168, October.

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