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Economic Theories of Legal Liability

  • Robert D. Cooter
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    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.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.3.11
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    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 5 (1991)
    Issue (Month): 3 (Summer)
    Pages: 11-30

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    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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    1. Cook, Philip J & Graham, Daniel A, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 143-56, February.
    2. 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 1067-97, September.
    3. 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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