The (Legal) Value of Chance: Distorted Measures of Recovery in Private Law

Abstract

Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of reasonable investment or the benefit conferred, can provide optimal incentives to invest. This article demonstrates that the law often awards recovery that is neither purely cost-based nor purely benefit-based and instead equals either the greater or lesser of the two measures. These hybrid approaches to recovery distort compensation and incentives. The article demonstrates the surprising prevalence of these practices and explores informational and institutional reasons why they emerge.