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Liability for Pure Financial Loss: Revisiting the Economic Foundations of a Legal Doctrine

LIABILITY FOR PURE ECONOMIC LOSS IN EUROPE: FRONTIERS OF TORT LAW, M. Busani, V. Palmer, eds., Cambridge University Press, 2003

George Mason Law & Economics Research Paper No. 01-21

26 Pages Posted: 21 Aug 2001  

Francesco Parisi

University of Minnesota - Law School; University of Bologna

Abstract

The economic loss rule states that a plaintiff cannot recover damages for a pure financial loss. The comparative study of the pure economic loss rule reveals that in different jurisdictions, the legal definitions of the rule frequently lump together diverse situations. The actual significance of the notion of economic loss varies considerably across Western legal systems. Legal doctrines provide little insight as to why liability should, or should not, be denied. On the other hand, economic models of liability provide some valuable guidance for classifying different categories of economic loss, and identifying cases in which denial of recovery for economic loss would lead to inefficient outcomes. A law and economics analysis shows that a key factor in determining the optimal scope of the economic loss rule is in the relationship between pure economic loss and social loss. Economic loss should be compensable in torts only to the extent that it corresponds to socially relevant loss. After identifying several factual categories, this paper characterizes the optimal level of liability with reference to the relevant economic and social loss components and the resulting optimal incentives to reduce risk. In a few situations, the application of the optimal liability rule finds obstacles in entrenched principles of civil liability. Generally, however, the legal applications of the economic loss rule are consistent with the ideal liability rule identified by the economic model.

Suggested Citation

Parisi, Francesco, Liability for Pure Financial Loss: Revisiting the Economic Foundations of a Legal Doctrine. LIABILITY FOR PURE ECONOMIC LOSS IN EUROPE: FRONTIERS OF TORT LAW, M. Busani, V. Palmer, eds., Cambridge University Press, 2003; George Mason Law & Economics Research Paper No. 01-21. Available at SSRN: https://ssrn.com/abstract=279731 or http://dx.doi.org/10.2139/ssrn.279731

Francesco Parisi (Contact Author)

University of Minnesota - Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

University of Bologna ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

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