Does Tort Law Reform Help or Hurt Consumers?
Legal limits on insurance damage claims have been introduced in Australia, the United States and other jurisdictions. In this article, I construct a simple competitive model to analyse the effect of tort law reforms on consumers. The model shows that reforms to limit non-economic losses make consumers unambiguously worse off ex ante. Although insurance premiums fall and these reductions are passed on to consumers in full, this gain is more than offset by the increased risk that consumers are forced to bear. In contrast, reforms for income‐related (i.e. economic) losses lead to ambiguous outcomes. The potential benefits from limits to economic loss arise due to the inability of insurers to price discriminate on the basis of income or expected loss. Because of this, there is an implicit cross subsidy from low‐ to high‐income consumers that is embedded in the insurance premium and relevant product price. Tort law reforms partially unwind this cross subsidy. The results presented in this article show that tort law reforms may achieve their stated goal, such as lowering monetary prices, but can still make consumers worse off by introducing an uninsurable risk. There is also an important difference between reforms that limit claims for economic and non‐economic losses. Insurance for economic loss will generally include an implicit cross subsidy and, as a consequence, reforms can alter the ex ante utility for different groups of consumers in different ways.
Volume (Year): 86 (2010)
Issue (Month): 275 (December)
|Contact details of provider:|| Postal: Central Council Administration, L.P.O. Box 2161, Hawthorn VIC 3122|
Phone: 61 3 9497 4140
Fax: 61 3 9497 4140
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0013-0249
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0013-0249|
When requesting a correction, please mention this item's handle: RePEc:bla:ecorec:v:86:y:2010:i:275:p:563-577. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.