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Getting Incentives RightImproving Torts, Contracts, and Restitution$
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Robert D. Cooter and Ariel Porat

Print publication date: 2014

Print ISBN-13: 9780691151595

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691151595.001.0001

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(p.105) 7 Anti-Insurance
Getting Incentives Right

Robert D. Cooter

Ariel Porat

Princeton University Press

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.

Keywords:   anti-insurance, breach of contract, compensation, losses, gains, incentives, damage mitigation, comparative fault, liquidated damages, paradox of compensation

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