Liability Rights As Contingent Claims

Abstract

A contingent claim is a right to receive money or goods in the event that a possible event actually occurs. A liability right is a right to money damages contingent upon conditions stipulated in law, such as the injurer's negligence causing the victim's harm. When the contingencies occur, a liability right matures into a legal right of action with a claim to damages. In principle, the victim could transfer his right to receive damages to someone else, and the injurer could pay someone else to assume his obligation to pay damages. The transfers could occur before or after the liability right matures. Exchange in a complete set of perfectly competitive markets allocates liability rights efficiently, regardless of the initial allocation by law. In practice, the law impedes such exchanges. Legal reforms could facilitate the development of competitive markets for liability rights, rather than impeding exchange. I explain briefly how competitive exchange could solve the problems of deterrence and insurance, lower the transaction cost of dispute resolution, and improve the quality of consent to waivers of liability. HARD COPY PAPER REQUESTS: Contact Chris Swain, School of Law, University of California, Berkeley, CA 94720-7200. E-mail: MAILTO:swainc@boalt.berkeley.edu Phone: (510) 642-0503. Fax: (510) 642-3767.