The Law of Restitution for Mistaken Payments: An Economic Analysis

48 Pages Posted: 10 Aug 2021 Last revised: 24 Jul 2023

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

UC Berkeley School of Law; CESifo (Center for Economic Studies and Ifo Institute); European Corporate Governance Institute (ECGI)

Nuno Garoupa

George Mason University - Antonin Scalia Law School

Date Written: August 10, 2021

Abstract

The law of restitution and unjust enrichment has emerged as an important and independent branch of private law globally, but has attracted relatively little economic analysis. This article develops a model of the core example of restitution - mistaken payments - in a parsimonious setting with two buyer-seller pairs and low (high) transaction costs within (across) pairs. The framework is based on the idea that mistaken payments to strangers impose a “transaction tax” on contracting parties. We show that full (partial) restitution is socially optimal when harm is unilateral (bilateral). The model generates several novel insights, shedding new light on the rationale for partial restitution, on distortions generated by the change of position defense, and on the discharge for value doctrine (implicated in the recent widely-discussed case involving a large mistaken payment by Citibank). Taking account of moral obligations complicates the economic analysis but does not undermine our main results.

Keywords: Restitution; Mistaken payments; Transactions tax; Unjust enrichment; Economic analysis of private law

JEL Classification: K10; H20

Suggested Citation

Dharmapala, Dhammika and Garoupa, Nuno, The Law of Restitution for Mistaken Payments: An Economic Analysis (August 10, 2021). University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 931, George Mason Law & Economics Research Paper No. 21-18, Available at SSRN: https://ssrn.com/abstract=3902607 or http://dx.doi.org/10.2139/ssrn.3902607

Dhammika Dharmapala (Contact Author)

UC Berkeley School of Law ( email )

302 JSP
2240 Piedmont Ave
Berkeley, CA 94720
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Nuno Garoupa

George Mason University - Antonin Scalia Law School ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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