We investigate the interaction between the law’s prohibition of recovery for unrequested benefits, and parties’ incentives at the ex ante stage to acquire information about the harms or benefits of the activities they consider engaging in. We analyze the impact of these interactions on the efficiency ranking of two damages regimes: ex ante damages and ex post damages. We show that ex post damages induce information acquisition, thus potentially leading to more efficient decision-making. However, under an ex post regime, the existence of, and the prohibition of recovery for, unrequested benefits distort parties’ incentives to acquire information and engage in the activity. Taking into account the tradeoff between these effects, we show that the relative efficiency of ex ante versus ex post damages depends on the size of potential unrequested benefits, and how the ex ante damages are calculated by courts, specifically, whether they are truncated or not. The larger the potential unrequested benefits, the more likely non-truncated ex ante damages outperform ex post damages. In contrast, ex post damages are always more efficient than truncated ex ante damages.
Liu, Zhiyong (John) and Avraham, Ronen and Qiao, Yue, Unrequested Benefits, Damages Assessment, and Information Acquisition (January 31, 2021). American Law and Economics Review.