The Economics of the Rule of Laesio Enormis (Die laesio enormis als enorme Laesion der sozialen Wohlfahrt?)
Kristoffel R. Grechenig
Max-Planck-Institute for Research on Collective Goods
Journal für Rechtspolitik, No. 1, 2006
The rule of laesio enormis has its origins in ancient Roman law and can be found e.g. in the Austrian Civil Code. Under this rule, a party may seek to have the contract cancelled where the value of the consideration owed by one party is more than double that of the other contracting party. The right would be triggered in the case of the purchase of a painting for a presumed market value of 100, where the true value (the painting is in fact from a famous artist) is 600. Accordingly, the vendee is dissuaded from investing into producing information because he is not guaranteed to recoup the costs he has incurred. By virtue of the laesio enormis rule the buying party will be inclined to offer at least 300; in doing so, he may be giving away valuable information by signalling to the seller that the painting has a higher value. Overall, this results in the underproduction of information and is detrimental for social welfare.
Note: Downloadable document is in German.
Number of Pages in PDF File: 12
Keywords: Productive information, unproductive information, foreknowledge, information asymmetry
JEL Classification: K12
Date posted: October 19, 2005