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Class action and financial markets: insights from law and economics

Author

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  • Donatella Porrini
  • Giovanni B. Ramello

Abstract

Purpose - Class action (CA) has long been used in practice (mainly in the USA) and studied by academics especially in the shareholder protection area. This paper aims to apply the same practice within the current financial meltdown context. Design/methodology/approach - The paper faces the issue by comparingex anteregulation with anex postregulatory system, basically dependent on the action of the consumer who can sue firms that behave unfairly. The arguments are provided by the law and economics (LE) approach. Findings - According to LE, 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 LE arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of CAs 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. Originality/value - The paper maintains that CA intended as a complementaryex postregulatory device can play a significant role in addressing a failure thatex anteregulation has not in financial markets. This is coherent with the LE tradition that interprets tort law remedies as a solution for internalizing externalities and providing the correct incentive to the markets.

Suggested Citation

  • Donatella Porrini & Giovanni B. Ramello, 2011. "Class action and financial markets: insights from law and economics," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 3(2), pages 140-160, May.
    • Handle: RePEc:eme:jfeppp:v:3:y:2011:i:2:p:140-160
    DOI: 10.1108/17576381111133615
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    Cited by:

    1. 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.
    2. Alberto Cassone & Giovanni Ramello, 2011. "The simple economics of class action: private provision of club and public goods," European Journal of Law and Economics, Springer, vol. 32(2), pages 205-224, October.
    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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    More about this item

    Keywords

    Legal action; Financial markets; Laws and legislation; Torts; United States of America;
    All these keywords.

    JEL classification:

    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • G01 - Financial Economics - - General - - - Financial Crises
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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