Class action and financial markets: insights from law and economics
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 comparing ex ante regulation with an ex post regulatory 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 complementary ex post regulatory device can play a significant role in addressing a failure that ex ante regulation 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 3 (2011)
Issue (Month): 2 (July)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/jfep.htm Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lopez-de-Silanes, Florencio & La Porta, Rafael & Shleifer, Andrei, 2008.
"The Economic Consequences of Legal Origins,"
2962610, Harvard University Department of Economics.
- Jain, Satish (ed.), 2010. "Law and Economics," OUP Catalogue, Oxford University Press, number 9780198067733, May.
- Chiou, Wan-Jiun Paul & Lee, Alice C. & Lee, Cheng-Few, 2010. "Stock return, risk, and legal environment around the world," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 95-105, January.
- Donatella Porrini & Giovanni B. Ramello, 2005.
"Competition in banking: switching costs and the limits of antitrust enforcement,"
in: Law and the State, chapter 13
Edward Elgar Publishing.
- Giovanni B. Ramello & Donatella Porrini, 2004. "Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement," LIUC Papers in Economics 153, Cattaneo University (LIUC).
- Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
- Haidar, Jamal Ibrahim, 2009.
"Investor protections and economic growth,"
Elsevier, vol. 103(1), pages 1-4, April.
- Jean-Michel Josselin & Alain Marciano, 2005. "Law and the State : a political economy approach," Post-Print halshs-00103718, HAL.
- Field, Alexander James, 1991. "Do legal systems matter?," Explorations in Economic History, Elsevier, vol. 28(1), pages 1-35, January.
- Marta Cenini & Barbara Luppi & Francesco Parisi, 2011. "Incentive effects of class actions and punitive damages under alternative procedural regimes," European Journal of Law and Economics, Springer, vol. 32(2), pages 229-240, October.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000.
"Investor protection and corporate governance,"
Journal of Financial Economics,
Elsevier, vol. 58(1-2), pages 3-27.
- La Porta, Rafael & Lopez-de-Silanes, Florencio & Schleifer, Andrei & Vishny, Robert, 2001. "Investor Protection and Corporate Governance," Working Paper Series rwp01-017, Harvard University, John F. Kennedy School of Government.
- Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
- Alon Klement, 2004. "Incentive Structures for Class Action Lawyers," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 102-124, April.
- Dyck, Alexander & Morse, Adair & Zingales, Luigi, 2007.
"Who Blows the Whistle on Corporate Fraud?,"
CEPR Discussion Papers
6126, C.E.P.R. Discussion Papers.
- Alberto Cassone & Giovanni B. Ramello, 2011.
"The Simple Economics of Class Action: Private Provision of Club and Public Goods,"
ICER Working Papers
06-2011, ICER - International Centre for Economic Research.
- 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.
- Cassone, Alberto & Ramello, Giovanni B., 2011. "The Simple Economics of Class Action: Private Provision of Club and Public Goods," IEL Working Papers 3, Institute of Public Policy and Public Choice - POLIS.
- Edward L. Glaeser & Andrei Shleifer, 2003.
"The Rise of the Regulatory State,"
Journal of Economic Literature,
American Economic Association, vol. 41(2), pages 401-425, June.
- Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," Harvard Institute of Economic Research Working Papers 1934, Harvard - Institute of Economic Research.
- Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," NBER Working Papers 8650, National Bureau of Economic Research, Inc.
- G.G.A. de Geest & G. Dari Mattiacci, 2005. "Soft Regulators, though judges," Working Papers 05-06, Utrecht School of Economics.
- Schmitz, Patrick W., 2000.
"On the Joint Use of Liability and Safety Regulation,"
12536, University Library of Munich, Germany.
- 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.
- Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
- Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
- Edward Glaeser & Simon Johnson & Andrei Shleifer, 2001. "Coase Versus the Coasians," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 853-899.
- Haymond, Jeffrey & West, James E, 2003. " Class Action Extraction?," Public Choice, Springer, vol. 116(1-2), pages 91-108, July.
- Noll, Roger., 1983. "The Political Foundations of Regulatory Policy," Working Papers 486, California Institute of Technology, Division of the Humanities and Social Sciences.
- Valimaki, Mikko, 2010. "Introducing Class Actions in Finland: an Example of Lawmaking without Economic Analysis," POLIS Working Papers 152, Institute of Public Policy and Public Choice - POLIS.
- Antony W. Dnes, 2005. "Enron, corporate governance and deterrence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(7), pages 421-429.
When requesting a correction, please mention this item's handle: RePEc:eme:jfeppp:v:3:y:2011:i:2:p:140-160. 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: (Virginia Chapman)
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.