This chapter proposes a novel contract, dubbed “anti-insurance,” that perfectly solves the paradox of compensation. Breach of contract by the promisor poses a risk of loss to the promisee. With anti-insurance, promisor's liability for breach is 100 percent and promisee's compensation is 0 percent, as required for efficient incentives. The chapter first illustrates how anti-insurance works with a numerical example and considers some factors affecting its scope. It then presents examples of anti-insurance for losses and gains before comparing anti-insurance with other legal devices that give incentives to the promisee without eroding the promisor's incentives; these include mitigation of damages, foreseeability of damages, comparative fault, and liquidated damages. It concludes by explaining why anti-insurance is not available in the market.
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