The Economics of the Rule of Laesio Enormis (Die laesio enormis als enorme Laesion der sozialen Wohlfahrt?)

Journal für Rechtspolitik, No. 1, 2006

12 Pages Posted: 19 Oct 2005  

Kristoffel R. Grechenig

Max-Planck-Institute for Research on Collective Goods

Abstract

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.

Notes: Downloadable document is in German.

Keywords: Productive information, unproductive information, foreknowledge, information asymmetry

JEL Classification: K12

Suggested Citation

Grechenig, Kristoffel R., The Economics of the Rule of Laesio Enormis (Die laesio enormis als enorme Laesion der sozialen Wohlfahrt?). Journal fur Rechtspolitik, No. 1, 2006. Available at SSRN: https://ssrn.com/abstract=820187

Kristoffel R. Grechenig (Contact Author)

Max-Planck-Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49 228 91416-51 (Phone)
+49 228 91416-851 (Fax)

HOME PAGE: http://sites.google.com/site/kristoffelgrechenig

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