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Allocation of fault in contract law

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  • Jacobi, Osnat
  • Weiss, Avi

Abstract

In this paper we consider situations in which the parties are in disagreement about the allocation of a certain risk, and either party could have acted ex-ante to prevent breach, to lower its probability or to insure against it (“least-cost avoidance” in tort law), but neither did so. When the state-of-the-world is revealed there remain steps the parties can take to prevent breach or mitigate damages. We consider strict liability and other regimes such as negligence and comparative fault, and show that the first-best solution is not achieved in those regimes because they incentivize the parties to consult the court in order to determine the identity of the obligor, and this is done only after the contract has collapsed.

Suggested Citation

  • Jacobi, Osnat & Weiss, Avi, 2013. "Allocation of fault in contract law," International Review of Law and Economics, Elsevier, vol. 36(C), pages 1-11.
  • Handle: RePEc:eee:irlaec:v:36:y:2013:i:c:p:1-11 DOI: 10.1016/j.irle.2013.02.002
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    References listed on IDEAS

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    1. Nuno Garoupa, 2009. "Least-Cost Avoidance: The Tragedy of Common Safety," Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(1), pages 235-261, May.
    2. Marco Alan C. & Van Woerden Adon S. & Woodward Robert M., 2009. "The Problem of Shared Social Cost," Review of Law & Economics, De Gruyter, vol. 5(1), pages 137-153, April.
    3. Steven Shavell, 1980. "Damage Measures for Breach of Contract," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 466-490, Autumn.
    4. Bebchuk, Lucian Arye & Ben-Shahar, Omri, 2001. "Precontractual Reliance," The Journal of Legal Studies, University of Chicago Press, vol. 30(2), pages 423-457, Part I Ju.
    5. Robert Cooter & Ariel Porat, 2004. "Decreasing-Liability Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 33(1), pages 157-197, January.
    6. A. Mitchell Polinsky, 1980. "Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies," NBER Working Papers 0463, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Contract law; Breach of contract; Unallocated risk; Strict liability regime; Fault regime; Bilateral care; Unilateral care; Mechanism design; Revelation principle;

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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