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American Law and Economics Review 2005 7(2):484-522; doi:10.1093/aler/ahi014
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© The Author 2005. Published by Oxford University Press on behalf of the American Law and Economics Association. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org

The (Legal) Value of Chance: Distorted Measures of Recovery in Private Law

Omri Ben-Shahar

University of Michigan Law School

Robert A. Mikos

University of California, Davis, School of Law

Send correspondence to: Omri Ben-Shahar, University of Michigan Law School, 625 S. State St., Ann Arbor, MI 48109; E-mail: omri{at}umich.edu.

Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of reasonable investment or the benefit conferred, can provide optimal incentives to invest. This article demonstrates that the law often awards recovery that is neither purely cost-based nor purely benefit-based and instead equals either the greater or lesser of the two measures. These hybrid approaches to recovery distort compensation and incentives. The article demonstrates the surprising prevalence of these practices and explores informational and institutional reasons why they emerge.


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