On the Role of Sales Taxes for Efficient Compensation of Property Loss Under Strict Liability

Baumann Florian () and Tim Friehe
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Baumann Florian: CASTLE, University of Bonn, Adenauerallee 24–42, 53113 Bonn, Germany

Review of Law & Economics, 2024, vol. 20, issue 1, 21-34

Abstract: When a victim loses property due to an injurer’s wrongful act, it must be decided whether the damages award should include the sales taxes associated with the lost property’s replacement. This is especially acute when the victim can make other use of the damages award than replacement. This paper compares regimes that differ in how they treat sales taxes, focusing on possible distortions of consumption and care choices. We find that regimes that include sales taxes in damages awards only when incurred to replace the lost property (as, for instance, the German Civil Code does) induce suboptimal consumption and care incentives. Distortions of care incentives also depend on the nature of care expenditures (monetary or non-monetary).

Keywords: care; damages; efficiency; liability; sales tax (search for similar items in EconPapers)
JEL-codes: H24 K13 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/rle-2023-0060

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