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http://ssrn.com/abstract=1010774
 
 

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Decoupling as Transactions Tax


Nuno M. Garoupa


University of Illinois College of Law

Chris William Sanchirico


University of Pennsylvania Law School; University of Pennsylvania Wharton School - Business Economics and Public Policy Department

September 1, 2007

Journal of Legal Studies, Vol. 39, No. 2, 2010
U Illinois Law & Economics Research Paper No. LE07-029

Abstract:     
In an influential paper Polinsky and Che (1991) propose that litigation can be made a more cost effective tool for setting primary activity incentives (e.g., for product safety or promissory performance) by reducing plaintiffs' recovery while simultaneously raising defendants' damages. "Decoupling" in this manner reduces the number of filed suits, but increases the deterrent impact of each. Litigation costs fall, but, if damages are raised sufficiently, deterrence is maintained. Yet when the state takes from liable defendants more than it gives to victorious plaintiffs it effectively taxes (probabilistically and collectively) the transaction that led to the present litigation. This tax drives a wedge between the expected social and private benefits of participating in the transaction in the first place. The result is that socially beneficial transactions fail to take place. In this paper we explore the impact of this transactions-discouraging effect on the propriety of decoupling.

Number of Pages in PDF File: 24

Keywords: decoupling, contracts, torts, private versus social surplus

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Date posted: August 31, 2007 ; Last revised: October 21, 2010

Suggested Citation

Garoupa, Nuno M. and Sanchirico, Chris William, Decoupling as Transactions Tax (September 1, 2007). Journal of Legal Studies, Vol. 39, No. 2, 2010; U Illinois Law & Economics Research Paper No. LE07-029. Available at SSRN: http://ssrn.com/abstract=1010774 or http://dx.doi.org/10.2139/ssrn.1010774

Contact Information

Nuno M. Garoupa (Contact Author)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
HOME PAGE: http://works.bepress.com/nunogaroupa/
Chris William Sanchirico
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-4220 (Phone)
HOME PAGE: http://www.law.upenn.edu/faculty/csanchir/
University of Pennsylvania Wharton School - Business Economics and Public Policy Department
3641 Locust Walk
Philadelphia, PA 19104-6372
United States
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