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Class Action and Financial Markets: Insights from Law and Economics

Journal of Financial Economic Policy, 3(2), pp. 140-160

University of Eastern Piedmont Department of Public Policy and Public Choice Working Paper No. 166

25 Pages Posted: 17 Jan 2011 Last revised: 11 Oct 2012

Giovanni Battista Ramello

University of Piemonte Orientale - A. Avogadro - Department of Public Policy and Public Choice; International Centre for Economic Research (ICER)

Donatella Porrini

Universita di Lecce - Facolta di Economia

Date Written: January 17, 2011

Abstract

According to the law and economics approach, 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 law and economics arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of class actions 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. In this vein, the paper argues that class action intended as a complementary ex-post regulatory device can play a significant role in addressing a failure that ex-ante regulation has not. This is coherent with the law and economics tradition that interprets tort law remedies as a solution for internalizing externality and providing the correct incentive to the markets.

Keywords: Class Action, Pure Economic Loss, Regulation, Liability, Deterrence

JEL Classification: K41, K13, G01, H41

Suggested Citation

Ramello, Giovanni Battista and Porrini, Donatella, Class Action and Financial Markets: Insights from Law and Economics (January 17, 2011). Journal of Financial Economic Policy, 3(2), pp. 140-160. Available at SSRN: https://ssrn.com/abstract=1742371

Giovanni Battista Ramello (Contact Author)

University of Piemonte Orientale - A. Avogadro - Department of Public Policy and Public Choice ( email )

Via Cavour 84
15100 Alessandria
Italy

International Centre for Economic Research (ICER) ( email )

Villa Gualino
Viale Settimio Severo, 63
10133 Torino
Italy

Donatella Porrini

Universita di Lecce - Facolta di Economia ( email )

Ecotekne
Via per Monteroni
73100 Lecce
Italy

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