An Economic Analysis of Restitution for Mistaken Payments

ABSTRACT:

The law of restitution and unjust enrichment has emerged as an important and independent branch of private law. However, it has attracted relatively little economic analysis. The aim of this paper is to develop a general conceptual framework for the economic analysis of the core example of restitution - mistaken payments. Our framework distinguishes between scenarios with unilateral and bilateral harms from mistakes, and unilateral and bilateral precaution by payers and recipients. Using this taxonomy, we develop a formal model in a parsimonious setting with two buyer-seller pairs. This model generates several novel insights, based on the idea that mistaken payments impose a “transaction tax” on contracting parties. It implies that full restitution is socially optimal when harm is unilateral (i.e., when a mistaken payment harms only the payer). When harm is bilateral (i.e., the recipient would suffer net harm from receiving the payment and making full restitution), partial restitution is generally optimal. However, we propose a hypothetical decoupled regime that would (if it were feasible) lead to more efficient outcomes than would partial restitution. The decoupling regime is intended as a thought experiment that can arguably shed light on some of the foundational debates surrounding the law of restitution.