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Economic Theories of Legal Liability

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  • Robert D. Cooter

Abstract

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.

Suggested Citation

  • Robert D. Cooter, 1991. "Economic Theories of Legal Liability," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 11-30, Summer.
  • 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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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.5.3.11
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    References listed on IDEAS

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    1. 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.
    2. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, Oxford University Press, vol. 91(1), pages 143-156.
    3. 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 1067-1097, September.
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    Cited by:

    1. Berglof, Erik & Claessens, Stijn, 2004. "Enforcement and Corporate Governance," Policy Research Working Paper Series 3409, The World Bank.
    2. Baumann, Florian & Friehe, Tim, 2016. "Learning-by-doing in torts: Liability and information about accident technology," Economics Letters, Elsevier, vol. 138(C), pages 1-4.
    3. Pouliot, Sébastien, 2012. "On the Economics of Adulteration in Food Imports: Application to US Fish and Seafood Imports," Working Papers 148596, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    4. Kvaløy, Ola & Olsen, Trond E., 2015. "The tenuous relationship between effort and performance pay," Journal of Public Economics, Elsevier, vol. 121(C), pages 32-39.
    5. Schmitz, Patrick W., 2000. "On the joint use of liability and safety regulation," International Review of Law and Economics, Elsevier, vol. 20(3), pages 371-382, September.
    6. Rouillon, Sebastien, 2008. "Safety regulation vs. liability with heterogeneous probabilities of suit," International Review of Law and Economics, Elsevier, vol. 28(2), pages 133-139, June.
    7. Grajzl, Peter & Baniak, Andrzej, 2009. "Industry self-regulation, subversion of public institutions, and social control of torts," International Review of Law and Economics, Elsevier, vol. 29(4), pages 360-374, December.
    8. Sofia Amaral-Garcia, 2015. "Non-economic Damages in Medical Malpractice Appeals: Does the Jurisdiction Make a Difference?," Discussion Papers of DIW Berlin 1506, DIW Berlin, German Institute for Economic Research.
    9. George A. Schieren, 2007. "Economic Efficiency and Damage Awards in Personal Injury Torts," Working Papers 07-08, Department of Economics, Appalachian State University.
    10. Sjur Didrik Flåm & Elmar G. Wolfstetter, 2015. "Liability Insurance and Choice of Cars: A Large Game Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(6), pages 943-963, December.
    11. Fraser, Clive D., 1996. "On tort as an implicit insurance system with state-dependent utility: The case of child mortality risk," International Review of Law and Economics, Elsevier, vol. 16(4), pages 449-459, December.
    12. Giuseppe Dari-Mattiacci & Bruno Lovat & Francesco Parisi, 2014. "Loss-Sharing between Nonnegligent Parties," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 170(4), pages 571-598, December.
    13. repec:eee:jeeman:v:83:y:2017:i:c:p:107-120 is not listed on IDEAS
    14. Lakdawalla, Darius & Zanjani, George, 2005. "Insurance, self-protection, and the economics of terrorism," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1891-1905, September.
    15. Friehe, Tim & Langlais, Eric, 2017. "Prevention and cleanup of dynamic harm under environmental liability," Journal of Environmental Economics and Management, Elsevier, vol. 83(C), pages 107-120.
    16. TAKEDA Yosuke & UCHIDA Ichihiro, 2015. "Innovation and Legal Enforcement for Competition Policy: Theory and international evidence from overseas subsidiaries of the Japanese auto-parts suppliers," Discussion papers 15046, Research Institute of Economy, Trade and Industry (RIETI).
    17. Alfred Endres & Tim Friehe, 2013. "The monopolistic polluter under environmental liability law: incentives for abatement and R&D," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 40(3), pages 753-770, March.
    18. Takaoka, Sumiko, 2005. "The effects of product liability costs on R&D with asymmetric information," Japan and the World Economy, Elsevier, vol. 17(1), pages 59-81, January.
    19. Stremitzer, Alexander & Tabbach, Avraham, 2009. "Insolvency and Biased Standards - The Case for Proportional Liability," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 289, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    20. Cooter, Robert D., 1999. "Punitive Damages, Social Norms, and Economic Analysis," Berkeley Olin Program in Law & Economics, Working Paper Series qt7h38w307, Berkeley Olin Program in Law & Economics.
    21. Satish K. Jain & Rajendra P. Kundu, 2004. "Economic Efficiency, Distributive Justice and Liability Rules," Working papers 130, Centre for Development Economics, Delhi School of Economics.
    22. Andreas Papatheodorou & Nikos Platis, 2007. "Airline Deregulation, Competitive Environment and Safety," Rivista di Politica Economica, SIPI Spa, vol. 97(1), pages 221-242, January-F.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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