Economic Loss

“The Core of Pure Economic Loss” by GIUSEPPE DARI-MATTIACCI, Universiteit van Amsterdam – Amsterdam Center for Law and Economics George Mason University School of Law; and HANS-BERND SCHäFER, University of Hamburg Faculty of Law.

This article has implications for contracts and torts. It asks whether or not loss of earnings should be compensated? The established law and economics wisdom considers pure economic loss as a transfer of wealth from the victim to a third party, whose earnings increase as a consequence of the accident. Such transfers do not amount to a social loss and, hence, should not be compensated. This article revisits these arguments and shows that the social loss should be calculated by taking into account that: (a) pure economic loss often involves impairment costs resulting from the fact that valuable resources cannot be temporarily used; and (b) the third-party earnings come at the cost of increased capacity. This increased capacity mitigates the expected harm and, hence, is a form of precaution. By taking into account these factors, this article shows that most pure economic loss cases do result in a socially relevant loss. In addition, this article argues that the absence of a social loss is a necessary, but not sufficient, condition for the denial of compensation. The victim (or a third party) may have actually paid for protection against purely private losses. Thus, compensation should be awarded irrespective of whether national law treats the case under tort or contract (where compensation is undisputed). Finally, this article offers considerations on the optimal design of liability rules.