Research Handbooks in Financial Law series
Edited by Julian Burling and Kevin Lazarus
Chapter 2: Methodology: Applying Economics to Insurance Law – An Introduction
Lloyd R. Cohen and Michelle E. Boardman Insurance is fundamentally an economic activity. It is artiﬁcial to attempt to separate the law of insurance from the economics of it.1 This chapter applies the sub-discipline of law and economics to questions of insurance and insurance law. While we hope that all readers will have heard of this approach, we suspect that many harbor mistaken assumptions about it. So we shall brieﬂy try to provide a broad overview and a context in which to place it. In a fundamental sense law and economics is nothing new – and this is what explains its great success. Scholars of the law – certainly in the English tradition – have always been concerned with three questions seen as central to the law and economics enterprise. First, what is the effect of a given law? How will people behave in response to it? For example, what would be the likely response of rapists to a law permitting or mandating capital punishment for this offense? Would such a law provide an incentive for a rapist to kill his victim and thereby eliminate the principle witness to the crime? In the language of economics this represents a concern about maintaining ‘marginal deterrence’. Second, what should the law be? By some metric of the good, the just, the salutary what law will maximize the maximand? Here we have the dual questions of determining the proper goal – perhaps aggregate social wealth – and the substantive and procedural rules to promote the goal....
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