Law, Economics and Risk‐Taking

In: Kyklos: international review for social sciences, Band 36, Heft 1, S. 3-20

Abstract

SUMMARYThe law shifts the risks borne by individuals in society and thereby influences the allocation of resources in society, the distribution of income and economic growth. Consequences for economic efficiency of the legal sanctioning of risk spillovers or externalities are analysed using the Kaldor‐Hicks criterion. Examples are given in which the law encourages excessive risk‐taking from a social point of view along with a few cases in which it leads to an excessive reduction in risk‐taking. It is observed that the legal practice of compensating for actual damages sustained, rather than for the risk or possibility of damage, is least costly to parties creating the risk. Product liability is discussed. It is argued that the distribution of income rather than gains in economic efficiency provides the main rationale for strict product liability.