Anti-insurance

Robert Cooter and Ariel Porat

The Journal of Legal Studies, 2002, vol. 31, issue 2, 203-32

Abstract: In standard models of contracts, efficient incentives require the promisor to pay damages for nonperformance and the promisee to receive no damages. To give efficient incentives to both parties, we propose a novel contract requiring the promisor to pay damages for nonperformance to a third party, not to the promisee. In exchange for the right to damages, the third party pays the promisor and promisee before performance or nonperformance occurs. We call this novel contract "anti-insurance" because it strengthens incentives by magnifying risk, whereas insurance erodes incentives by spreading risk. Anti-insurance is based on the general principle that when several parties jointly create risk, efficient incentives typically require each party to bear the full risk. Without a third party, the most that can be achieved is to divide the risk among the parties. By improving incentives, anti-insurance contracts can create value and benefit everyone as required for a voluntary exchange. Copyright 2002 by the University of Chicago.

Date: 2002
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1086/340845 (application/pdf)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlstud:v:31:y:2002:i:2:p:203-32

Access Statistics for this article

More articles in The Journal of Legal Studies from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().