Recovery for Probabilistic Benefit

Abstract

Private law is replete with instances in which parties who make costly investments that benefit others are entitled to recover from the beneficiaries, even in the absence of an explicit contract. When these investments yield only a chance for benefit, the law's treatment of the right to recovery turns out to be highly inconsistent. Many types of costly actions create uncertain (probabilistic) benefits. By the time the benefit becomes known, the law has to determine whether the recovery by the investing party should depend on the ex-post benefit as it materialized, or on the ex-ante value (the average benefit or the cost of the investment). Previous scholarship has shown that either the ex-post or the ex-ante approach, appropriately tuned, can create optimal incentives. This paper argues that, in practice, courts often fail to apply either the ex-ante or the ex-post approaches, and use instead "hybrid" approaches, which distort incentives. Under one hybrid approach, the investing party can recover either the ex-post benefit enjoyed by the beneficiary, or the cost of the investment, whichever is greater. Under a second hybrid approach, the investing party can recover either the ex post benefit or the cost of the investment, whichever is lesser. The paper shows that a variety of private law doctrines incorporate these hybrid approaches, and speculates on the reasons why they emerge. It suggests that hybrid rules can emerge inadvertently, in the interface between pure ex-post and ex-ante recovery rules, or as a result of courts' imperfect information. In addition, hybrid rules can be created deliberately, to adjust the measure of recovery. The paper argues that the magnitude of recovery adjustment embodied in these deliberate hybrid rules is rarely capable of serving its underlying goal.

JEL Classification: K11, K12, K42