Abstract

In this paper, I propose and defend a distinct and novel approach to compensation for risk impositions. I call it the Risk-Pooling System of compensation. This system suggests that when X performs an action that imposes a risk of harm to Y, then X is liable to Y, and is therefore obliged to make an ex ante compensation that is roughly equivalent to the expected cost of potential harm to a social- risk pool. If and when Y suffers harm as a result of the risk imposed by X, they then receive an ex post compensation roughly equivalent to the cost of actual harm suffered. This system of compensation creates a social buffer between the risk imposer – the one who has the duty to pay compensation into the pool – and the victim – the one who has the right to receive compensation from the social pool. I contend that the Risk-Pooling System is an improvement over its alternatives due to its capacity to produce the best social utilities, particularly, in terms of reducing information costs, obtaining optimal deterrence in the society and creating incentives for people to be engaged in social activities.