Law and economics are both hostile to liability for exposure to risk without actual harm. Harm is the foundation of civil remedies. Economics teaches that adequate compensation in the event of harm eliminates risk, obviating the need for compensation for exposure. I show that a risk averse victim can be made whole at lowest cost to a risk neutral injurer only if the law provides compensation to the victim both when the risk results in actual harm and when it does not result in any harm. This result depends on the plausible assumptions that there is always a risk that the level of compensation actually awarded by a court will not equal actual harm and that the victim’s marginal expected utility from such risky compensation is diminishing. This result applies whenever liability is strict and the harm is measurable.
|In preparation - 2017
- How Antitrust Really Works: A Theory of Input Control and Discriminatory Supply
- Ramsi Woodcock