International Review of Law and Economics 24 (2004) 525541

Remedies for damage to property: money damages

or restitution in natura?
Eleni Zervogianni

Law School of the University of Athens [Ph.D. candidate], 4 Kyprou Str., 15452 P. Psychiko, Athens, Greece
Abstract
This paper compares the tort remedies of moneydamages andrestitutioninnaturafromanefciency
perspective. Although there is a parallel between these remedies and the remedies for breach of
contract, i.e. money damages and specic performance, the analysis is fundamentally different in
torts, because of the high transaction costs involved. The basis of the comparison is the relation of
each of the remedies to the subjective loss for the victim. The conclusion drawn is that no rule is
generally preferable, so it is crucial to sort the different types of cases and apply in each of them the
remedy, which is better suited. On this premise, are evaluated the relevant rules of Germany, England
and France, since each legal system tackles this issue differently.
2005 Elsevier Inc. All rights reserved.
JEL classication: K-13
Keywords: Tort remedies; Money damages; Restitution in natura; Subjective value
1. Introduction
An important aim of tort law from a law and economics perspective is efcient accident
deterrence.
1
This can be achieved if liability rules are designed in a way to provide both the

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E-mail address: lena zervogianni@yahoo.com.
1
According to Calabresi, the aim of accident law is to minimize all accident costs, namely, the number and
the severity of accidents (primary costs), the social costs (secondary costs), and the administrative costs (tertiary
costs). See Calabresi (1970), pp. 2631. Since, the pursuit of each sub-goal is at least partially contradicting, the
0144-8188/$ see front matter 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.irle.2005.01.008
526 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
tortfeasor and the victim with incentives to engage in their activity adopting optimal levels
of care and activity.
2
One important variable of this problem is the accident loss. On the
basis of this value, courts determine the amount of compensation owed by the tortfeasor to
the victim, in case the former is held liable, thus inuencing the incentives of the parties.
This variable is more important under a strict liability rule than under a negligence rule,
due to the character of the rst rule as a price and of the second as a sanction.
3
Even so, it
maintains a certain importance in all cases.
However, an implicit assumption in all the relevant models is that accident costs can be
assessed in a perfect way. If this strong assumption is relaxed and the subjective valuation
of the victim is brought into the picture, the situation becomes puzzling: the subjective loss
of the victim of an accident, i.e. the diminution of his utility because of the accident, is
not observable by third parties.
4
Moreover, the victim himself will never voluntarily reveal
his true subjective costs; instead, he has incentives to overstate them, so that he can benet
from a higher compensation.
5
Given these conditions, when courts award money damages they actually have to rely on
observable proxies, in order to evaluate the unobservable loss that has been sustained. The
sum to which the compensation amounts depends on the proxy used by the court. Usually,
this refers either to the diminution of the market value of the damaged thing or to its costs of
repair or replacement. Often the two amounts coincide, but not necessarily, since prices of
things are derived from peoples marginal willingness to pay which may depend on factors
other than their objectively assessed quality.
An alternative remedy to money damages is restitution in natura, meaning the actual
restoration of the situation as it was before the damage, by repairing (or replacing) the
damaged thing. This restoration assures that the subjective loss of the victimis compensated,
whereas the need to evaluate the accident loss is circumvented.
6
This remedy presents two
further particularities which are key elements for the subsequent analysis; rst, it deprives
the victim from the freedom of the disposition of the amount of the compensation, and
second, the costs incurred by the tortfeasor in the event of restitution in natura do not
necessarily correspond to the benets that the victim derives from it.
7
pursuit of the others, in this paper, we focus mainly on the minimization of the primary accidents costs, which we
hold as logically prior.
2
See among others, Brown (1973), Shavell (1987), Landes and Posner (1987).
3
See Cooter (1984).
4
See De Alessi and Staaf (1989), Schmidtchen (1993), p. 69.
5
In the cases treated in this paper, the allocation of entitlements is given; it is derived from the need to align
the incentives of the parties and achieve efcient accident deterrence (see supra Note 1). Thus, in principle, the
victimhas the right to be free fromdamage. For this reason, the mechanisms developed by Ayres and Talley (1995)
and Ayres and Goldbart (2001) which aim at the unravel of subjective values in the context of the allocation of
rivalrous entitlements, mainly in cases of nuisance, are not of applicable to the cases examined here.
6
Restitution in natura is rather a property rule remedy in the sense of Calabresi and Melamed (1972). This
is puzzling considering that in torts the transaction costs of ex ante bargaining are prohibitively high. The cor-
responding problem in the context of contract law is phrased by Kronman (1979), pp. 352354, who examines
the role of expectation damages (liability rule) as the default remedy for breach of contract, in spite of the low
transactions costs between contracting parties.
7
These characteristics, on which the analysis focuses, are common in the repair and the replacement of the
thing. The comparison between these two forms of restitution in natura exceeds the scope of this paper.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 527
The issue can be clearly illustrated with the help of an example: Consider the facts of the
case Darbishire v. Warran:
8
The defendant damaged the old motorcycle of the plaintiff. The
diminutionof its value was not more than85. The costs of repair onthe other handamounted
to 192. On this basis we can start speculating. Indisputably, if 192 are invested in the full
repair of the motorcycle the victim would be as well off as before the accident.
9
The victim
might however yield the same utility if he would receive instead a smaller amount of money
(for instance 150), which he could dispose freely. The exact magnitude of this amount
depends on the preferences of the victim and reects his subjective valuation of the loss.
The aim of this paper is to compare the tort remedies of restitution in natura and money
damages from an efciency perspective. The basis of the comparison is the relation of each
of the remedies to the ideal compensation, which, at least in principle, corresponds to the
subjective accident loss for the victim. Of course, such comparison can take place only to the
extent that these two remedies can be viewed as alternatives. In other words, the cases treated
are cases where the repair or replacement of the damaged thing can be at least as satisfactory
as money damages. If, in spite of the restoration, the thing continues to be of reduced value,
restitution in natura is no longer an alternative to monetary compensation. Therefore, the
paper does not deal with damages, which cannot be made good with restitution in natura.
Finally, it is worth noting that, although the paper focuses on damage to chattels, the same
analysis same analysis also applies in case of damage to land.
At this point, it is worth noting that there is a parallel between the two rules mentioned
here and the basic remedies for breach of contract, namely money damages and specic
performance.
10
However, the problem is fundamentally different in contract law as com-
pared to tort law.
More specically, the terms of a contract are agreed upon by the parties and the contract
is priced accordingly. Thus, if a party attaches subjective value to a certain outcome, he may
want tosecure this outcome byagreeingona remedyof specic performance.
11
This remedy,
however, would make the breach of contract more expensive for the other contracting
party. The latter, anticipating this, will demand a higher price.
12
If this pricing mechanism
works correctly, a contracting party will not have any incentive to overstate his subjective
valuation on performance. In addition, penalty default contract rules, like for example the
doctrine of foreseeability, may induce a party with a high subjective value on performance to
divulge this and, consequently, limit his potential to behave opportunistically.
13
Thus, the
information asymmetry between the contracting parties is somehow mitigated. On these
8
(1963) 3 All England Law Reports 310, Court of Appeal. This case presents the particularity that the costs of
repair exceed the pre-accident value of the motorcycle, which was 85. Nevertheless, this is not crucial for the
current analysis.
9
For reasons of simplicity, we assume that there does not persist any residual damage, which cannot be made
good with the repair.
10
In contract law, there is extensive literature on this issue. See, among others, Kronman (1979), Schwartz (1979),
Ulen (1984), De Alessi and Staaf (1989).
11
We are assuming, for the sake of the argument, that parties can stipulate to specic performance as a remedy.
12
See among others, Kronman (1979), p. 366; Ulen (1998), p. 482; Craswell (1988), p. 631. This is also the
starting point of Mahoney (1995).
13
See Muris (1983), p. 383; Bebchuk and Shavell (1991), pp. 289292; Ayres and Gertner (1989), pp. 102102.
It should be noted that there is some controversy on this matter. See among others, Johnston (1990), Ayres and
Gertner (1991). However, a further analysis of this issue exceeds the scope of this paper.
528 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
premises, specic performance as a default remedy may induce post-breach bargaining,
which may be more efcient than a court judgement in protecting the innocent partys
subjective valuation on performance.
14
Torts, on the other hand, are involuntary transactions. Pre-accident agreements cannot
take place because of prohibitive transaction costs. Moreover, there is no way to mitigate
the information asymmetry between the parties. Under these conditions, post-accident bar-
gaining does not always lead to efcient results. This changes drastically the analysis of tort
remedies. Thus, the argumentation derived from the economic analysis of the contract law
remedies cannot be applied, at least not directly, to the tort cases examined in this paper.
We proceed to the analysis of the topic as follows: We show that the two rules can lead
to different results (1); then we compare them and derive a normative proposition (2). On
the basis of this proposition, we refer briey to the relevant rules in Germany, England,
and France and evaluate them. The choice of these legal systems is particularly interesting
because each one of them tackles this issue differently (3). In the conclusion, we sum up
the results and mention possible extensions of the paper (4).
2. Evaluation of the remedies
In this section, we compare the effects of the rule of restitution in natura and the rule
of money damages along the lines of the following dimensions: rst, we analyze the rules
from an efciency perspective, focusing on the incentives of the victim (Section 2.1). Then,
we comment on the effect of the rules on the incentives of the tortfeasor in particular
(Section 2.2). This analysis is followed by some considerations about the implementation
costs related to each remedy (Section 2.3). Finally, based on the above results, we formulate
a normative proposition (Section 2.4).
2.1. Efciency considerations focusing on the incentives of the victim
As already noted, the amount of compensation that the tortfeasor anticipates to pay in
the event of an accident inuences his choice about his level of care and activity. Likewise,
in bilateral cases, i.e. in cases where the behavior of the victim can inuence the probability
and the extent of the accident loss, the expected compensation also inuences the decisions
of the victim, as far as precaution is concerned.
The way we proceed, is by distinguishing between cases where the costs of repair or
replacement of the thing and the diminution of its market value are equal (Section 2.1.1),
and cases where the rst costs exceed the latter (Section 2.1.2).
15
In addition, the probability
that the parties will bargain and reach an agreement is a crucial parameter of this analysis,
and thus, merits closer consideration (Section 2.1.3).
14
See De Alessi and Staaf (1989), p. 572 and Ulen (1998), p. 482.
15
The cases where the diminution of the market value of the thing is greater than the repair costs, as for example
in case of serious car accidents (the repaired car is usually still less valuable than it was before the accident), are not
treated because, as already mentioned, in these cases the two rules are no longer alternatives; if the remedy applied
is restitution in natura, the extra loss will persist. Such losses can only be covered by monetary compensation.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 529
2.1.1. Cases where the diminution of the price equals the costs of repair
On many occasions, the diminution of the market value of an item corresponds to the
costs of its repair (or replacement). This is mainly the case for serious damages, which
prevent the proper use of the thing.
At rst glance, it seems that in such cases the choice of the legal rule is irrelevant.
However, this is true only if the subjective costs of the victim equal the diminution of the
market value of the thing. In any different case, the choice of the legal rule matters. This
can be illustrated on the basis of the following graph (S stands for the subjective loss for
the victim
16
, Dv for the diminution of the market price, R for repair (or replacement)
costs. Rn and Rm refer to the benet of the victim in case the tortfeasor pays R; Rn is his
benet in the case of remedy of restitution in natura and Rmhis benet in the case of money
damages).
S can be less than Dv and R if, for instance, the pre-accident subjective value of the
damaged thing for the victim was less that its market price. Although this case does not
seem very plausible because the victim would have sold the thing in the rst place, it could
occur since markets for used things do not always function well.
Under the above-mentioned circumstances, S would be the ideal compensation. If the
tortfeasor is compelled to cover the diminution of the market value of the damaged thing
or its costs of repair he internalizes more than the harm he externalized. However, there is
a fundamental difference as far as the benets that the victim derives under each remedy.
Money damages, regardless of the proxy on the basis of which they are assessed, over-
compensate the victim, in the sense that the latter, by disposing freely the amount of the
compensation, can be better off than he was before the accident. This suggests that in the
case of money damages the problem of the moral hazard of the victim arises.
Under the rule of restitution in natura, on the other hand, the exact pre-accident situation
of the victim is restored (i.e. the thing is actually repaired), so he is as well off as before.
This remedy, however, is also inefcient, since it leads to misallocation of resources. In the
cases examined here, the same amount of money would yield more utility for the victim,
had it been used for purposes other than the repair of the damaged thing.
Nevertheless, the choice of the remedy matters as far as bargaining is concerned. More
specically, restitution in natura can induce the parties to bargain, if transaction costs are
low enough. This is due to the asymmetry between the costs of the tortfeasor to repair the
thing and the benets that the victims derives fromit. The victimwould settle for an amount
of money which is less than the costs of repair but higher than S, and the tortfeasor would,
16
When S appears on the line of the graph referring to the Costs for the tortfeasor, it is into parenthesis. The
parentheses are used in order to indicate that the subjective value of the victims is unknown to the tortfeasor.
530 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
of course, be willing to pay less than R. Therefore, the scope of bargaining is between S
and R.
In theory, the efcient bargaining outcome would be yielded if the victim would not
appropriate any bargaining surplus, in which case the compensation would correspond to
his subjective costs. However, such a result presupposes that the victim does not have any
bargaining power. This can never be the case, given the information asymmetry between
the victimand the tortfeasor: the victimknows the threat point of the tortfeasor but the latter
does not know the threat point of the former. Thus, the bargaining result will be a point
between S and R. Even so, the remedy of restitution in natura after bargaining distorts the
incentives of the parties less than the initial result. Restitution in natura cannot do worse
than money damages.
In general, the decision as to which rule is preferable under these circumstances depends
on the probability of bargaining and its costs. If the expected gain from bargaining, which
consists in the decrease of the distortion of the incentives facing both parties, exceeds the
expected cost from the misallocation of resources, caused by the inefcient repair, then
restitution in natura is preferable. In any other case, money damages are preferable.
2.1.2. Cases where the costs of repair exceed the diminution of the market value
In order to evaluate the remedy of money damages and that of restitution in natura,
when the costs of repair of the thing exceed the diminution of its value, it is necessary to
look into their possible relation to the subjective damage of the victim. For this purpose,
we distinguish between cases where subjective damages are less than the diminution of
the market price and cases where subjective damages are more than the diminution of the
market price, but less than the repair costs.
17
2.1.2.1. Case A: subjective loss is less than the diminution of the market value.
This case can be depicted as follows:
Such a case may arise when the damage does not prevent the use of the thing in which
the victim is interested. The damage will, of course, diminish the resale value of the thing
but this is of no great interest to the owner, since he does not intend to resell it. In any case,
the repair of the damaged thing may cost more than the diminution of its market value.
As mentioned above, perfect compensation would be S. Under both remedies, the tortfea-
sor internalizes more thanthe harmhe externalized. This effect is greater whencompensation
is calculated on the basis of R. Correspondingly, monetary compensation overcompensates
17
Symmetrically, a third case seems to exist where the subjective damages exceed the repair costs. This implies
that, even after repair, there will be some residual damage for the victim. These cases are out of the scope of
this paper, because we only treat those where money damages and restitution in natura are alternatives. If it is
restitution in natura is not feasible money damages are the only possible remedy.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 531
the victim. Restitution in natura on the other hand, does not overcompensate but may lead
to misallocation of resources, if no bargaining follows.
Nonetheless, restitution in natura induces parties to bargain. The scope of bargaining
is, as in the previous case, between S and R. Although S will never be an equilibrium,
bargaining could mitigate to some extent the inefciencies of the rule of restitution in natura.
The victim, however, will pretend that his threat point is at least Dv. The bargaining result
will be between Dv and R, and most likely, taking into account the increased bargaining
power of the victim, closer to R.
Hence, in the majority of such cases, monetary compensation calculated on the basis of
Dv is less inefcient than restitution in natura. Monetary compensation calculated on the
basis of R on the other hand performs worse than all rules.
2.1.2.2. Case B: subjective loss exceed the diminution of the market value.
In the cases examined here, S has a value greater than Dv. The following depiction refers
to a case where S is less than R. However, the same analysis applies basically when S equals
R.
Such cases seem to be the most usual ones. A typical example is that of a scratched car.
The subjective value, which in this case is higher than the market price, may be due to the
non-perfect substitutability of the good, especially under conditions that favor markets for
lemons. It may also be due to personal attachment of the victim to the thing. More con-
cretely, according to the ndings of experimental economic studies, a persons willingness
to pay for a good is systematically less than his willingness to accept for it.
18
This implies
an attachment of individuals to their own goods; therefore, the subjective value of a thing
is usually higher than its market price. This does not necessarily determine the result of the
comparison between the objective and the subjective diminution of the value. However,
there seems to be a positive correlation between the two.
As regards the performance of the tort remedies insucha case, it canbe seenfromthe lines
in the above graph that money damages on the basis of Dv lead to the undercompensation of
the victim. This means that the tortfeasor does not internalize all the harm he externalized.
On the other hand, if Sis less than Rmoney damages amounting to Rmay drive to the exactly
opposite result by leading the tortfeasor to internalize more harm than he externalized and
by overcompensating the victim.
As far as restitution in natura is concerned, it is efcient if S equals R. If S is at some
other point between Dv and R, like in the case depicted above, bargaining may result. If so,
the result will be a point between S and R, depending on the bargaining power of the parties,
and most likely closer to R, since the tortfeasor does not know the threat point of the victim.
18
This is known as the endowment effect. On the experiments realized and their implications see among others
Korobkin and Ulen (2000), pp. 11071113 and Hoffman and Spitzer (1993).
532 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
If on the other hand bargaining does not ensue, restitution in natura leads to misallocation
of resources; so it is more inefcient than monetary compensation, which consists in the
costs of repair.
Comparing money damages consisting in the diminution of the market value and resti-
tution in natura the result depends on the exact position of S. In general, performing the
same analysis as in the previous cases, it seems that the rule under which the compensation
closer approximates the loss of the victim is preferable.
2.1.3. Some reections on bargaining and its outcome
Although a thorough discussion on the probability that the parties strike a deal under the
conditions described in this paper is not possible in this place, it is necessary to consider
briey the main parameters which inuence this result. In general, people bargain if the
expected benets from bargaining exceed the expected costs. These costs refer to the effort
required in order to look for an exchange partner to negotiate with and, if an agreement
is reached, to enforce it.
19
In the cases examined, the location of the partner is not costly,
since the identity of the parties is not disputed. Moreover, the agreement that the parties
seek refers merely to a monetary payment from the tortfeasor to the victim; so it is rather
easy to enforce. The most problematic issue concerns the stricto sensu costs of negotiation.
Negotiations are facilitated when the rights of the parties are clear and information is
public. In the cases examined, although the rights of the parties are not disputed, at least
after the court decision, there is the abovementioned problem of asymmetric information.
20
Another factor, which may prevent parties fromreaching an agreement is hostility. However,
these problems may be overcome when the parties are advised by experienced lawyers.
21
Experimental evidence realized in similar frameworks indicates that private bargaining is
actually more effective than is often supposed.
22
On the basis of the above arguments, it is plausible to assume that bargaining will in
principle take place and lead to the conclusion of a deal at rather law cost. This way the
probability of misallocation on resources when the remedy applied is restitution in natura
is ruled out.
2.2. The incentives of the tortfeasor in particular
From the point of view of the tortfeasor, adopting the efcient level of care and activity
presupposes the anticipation of the amount of compensation he will have to pay if he is found
liable. However, in most accident cases the tortfeasor acts behind a veil of ignorance; he
cannot knowex ante the victims valuation of the damage. Usually, he cannot even anticipate
exactly which item he is going to damage.
As follows from the foregoing analysis, money damages calculated on the basis of the
diminution of the market value of the damaged thing lead to the tortfeasors internalizing
19
Coase (1960), p. 15.
20
On this issue, see Fudenberg and Tirole (1983).
21
See, however, Farnsworth (1999), who examined 20 cases of injunctions, but found no bargaining after judg-
ment in any of them. Anyway, the cases examined there, are similar but not identical with those treated by this
paper.
22
See De Meza (1998), pp. 278279, where he refers briey to the most important relevant experimental studies.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 533
sometimes more and sometimes less than the actually inicted harm. Nevertheless, if this
diminution of the market value were a good indicator of the mean value of damages suffered
by the victims, in spite of the possible deviations from case-to-case, the incentives of the
tortfeasor concerning accident deterrence would be overall efcient. However, the cases
where the subjective loss exceeds the diminution of the market price of the thing are by far
the most common ones.
23
On the other hand, compelling the tortfeasor to take on the repair or its costs seems to
performbetter when there is a subjective value attached to the damaged thing higher than its
market value. However, these costs may exceed the externality, which the tortfeasor caused,
and therefore, lead to overdeterrence. This result is to a certain extent mitigated under the
rule of restitution in natura, provided that bargaining succeeds.
If courts can decide which rule to apply on a case-to-case basis, it seems at rst glance
logical to deny any ex ante effect of the rules on the incentives of the tortfeasor, since
usually he cannot know ex ante under which case he will fall. However, this is not exact;
even so, the tortfeasor can estimate the mean value of compensation that the victim was
awarded in past cases. This amount can be expressed as a percentage of the diminution
of the market value of a thing (e.g. the mean compensation a victim usually receives may
amount in general to 120% of the diminution of the market value.) Then, the tortfeasor can
solve his maximization problem by calculating accordingly the expected compensation he
will pay, once found liable.
This is efcient, provided that the compensation that the victims usually receive is the
best possible approximation of their subjective losses, without any systematic tendency of
over- or undercompensation.
2.3. Implementation costs
Apart from the bargaining costs between the parties in cases of a rule of restitution in
natura, mentioned in Section 2.1.3, further considerations about the additional costs of
implementation of each rule are merited. These costs may refer either to the procedure
before the court or to the enforcement of each remedy.
As far as the costs of the procedure are concerned, money damages raise the cost of
the procedure, since the court has to calculate them. If the compensation consists in the
diminution of the market value of the thing, the costs rise the more individualized a thing is
and reach their peak in the case of unique goods.
24
If money damages consist in the costs of
repair the calculation is less costly, if a competitive market for repair is assumed. Under the
rule of restitution in natura on the other hand, the court does not need to assess the damage
in terms of money; it merely compels the tortfeasor to achieve a certain result (i.e. the actual
restoration of the damage).
25
By saving in conversion costs, this last rule is associated with
the minimal costs of procedure. Nevertheless, it is worth noting that also under the rule of
restitution in natura a rational tortfeasor will have to anticipate the cost of repair, in order
to adjust ex ante his level of care and activity. However, in this last case it is clear that the
23
See supra Section 2.1.2.2.
24
See Kronman (1979), pp. 360361.
25
For the same problem in the context of contract remedies, see Schwartz (1979), pp. 292293.
534 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
relevant costs are borne by the tortfeasor himself, whereas in case of procedural costs this
depends on the relevant legal rule in place.
As regards the enforcement costs, it is often claimed that the application of the rule of
restituton in natura is more costly, because it involves high monitoring costs and might lead
to further disputes of the parties as to whether the repair was proper or not.
26
This argument,
however, is not decisive; in a competitive market for repairs, it is unlikely to arise. Even if
this does not hold, it could be encountered if the victim and the tortfeasor were required
to agree on the relevant issues before performing the repair
27
or if the court would appoint
someone to supervise the repair.
28
Moreover, taking into account that restitution in natura
induces the parties to bargain as described in Section 2.1, once an agreement is reached
these costs are not relevant any more, since actual repair will not take place.
It is difcult to determine categorically which rule is associated with higher implementa-
tion costs.
29
This varies fromcase-to-case. However, if these cost were the decisive variable
it would be reasonable to claim that, the more individualized a thing is the more preferable
would be restitution in natura to monetary compensation.
2.4. Synopsis of the results and formulation of a normative proposition
Since, neither restitution in natura nor money damages provide both the victim and the
tortfeasor with the efcient incentives in all cases, there does not seem to exist an optimal
solution to the problem of compensating the real (subjective) accident losses. Looking for a
second best solution, it seems reasonable to classify the cases in different categories and treat
them separately. The more the mean amount of compensation of the victims approximates
their subjective costs, the better the incentives of the parties are aligned.
Summarizing the results of the above analysis and under the assumption that bargaining
succeeds, if the diminution of the market value equals the costs of restitution in natura, this
last remedy performs better. In the rest of the cases, the magnitude of the subjective valu-
ation involved is crucial:
30
the higher the subjective valuation involved, the more suitable
the remedy of restitution in natura. At this point, it is worth noting that money damages
consisting in the repair costs perform in all cases worse than any other, provided that resti-
tution in natura is followed by bargaining. This rule is clearly sub-optimal, and thus, does
not merit further consideration.
The normative proposition drawn is that a legal system should be exible; both remedies
of money damages (covering the diminution of the market value of the thing) and restitution
in natura should be available and the judge should be granted the discretion to decide on
26
See among others, Schwartz (1979), pp. 2923, who treat this problem in the context of the remedy of specic
performance in contract law.
27
If the victim chooses the mode of repair alone and the tortfeasor has to pay the bill, there is the danger of
opportunistic behavior on the part of the victim, who might collude with the repairman, charge a higher price, and
share the extracted benet.
28
This is an analogy from the proposition of Schwartz (1979), p. 294, who in order to face the problems of
supervision in the case of specic performance suggests the appointment of special masters by the court.
29
A similar statement is made by Kronman (1979), p. 374, concerning the costs of specic performance as
compared to the costs of expectation damages.
30
This was proposed by Muris (1983), p. 382, in the context of contracts.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 535
the basis of the particularity of each case which remedy applies. This can lead to rather
satisfactory results, provided, of course, that the courts follow a coherent practice, so that
legal certainty is not at stake.
This proposition lies on the assumption that the judge can identify the different types
of cases. This is not unrealistic: the presumption that the subjective costs of the victim
exceed by far the diminution of the market value of the thing, which is derived by ndings
of experimental economics
31
can serve as a starting point. Further criteria may refer either
to the owner of the thing or to the thing itself. More specically, in cases where a legal
person is the owner of the thing it is unlikely that any subjective value would be involved.
The same is valid for things, which are owned by natural persons but are merely functional
(e.g. instruments of work) or standardized commercial goods. Moreover, subjective value
seems to increase as the age of the thing increases. This is due to the fact that relatively
new things can be replaced rather easily, whereas things tend to get more individualized
through continuous use. A nal criterion may refer to the intensity of the use of the thing
by the owner. Of course, the distinction will not be perfect in all cases but as long as the
errors are stochastic and there is not a systematic tendency of over- or undercompensation
of the victim, the incentive effects of the rules are not distorted.
3. Short overview of different legal systems
The principle of restitutio in integrum, which is common in most legal systems, does
not suggest a concrete way to deal with the issue of the tort remedies. In comparative law
three patterns of solution can be distinguished; the precedence of restitution in natura over
monetary compensation; the pre-eminence of monetary compensation; and the recognition
of restitution in natura as a discretionary form of compensation.
32
Thus, in the light of the
conclusions of Section 2, we examine the rules of Germany, England and France, which we
hold as representative for each solution, respectively. The subsequent comparison is strictly
restricted to the scope of this paper.
3.1. Germany
Article 249, sentence 1 of the German Civil Code, which was formulated under the
inuence of the natural law philosophy, gives restitution in natura priority over money
damages. However, the second sentence of the same Article in the case of damage of a thing
grants to the victim the right to demand, instead of the actual restitution, the corresponding
amount of money.
33
From its formulation, it can be derived that the judge is bound by the
claim of the victim.
31
See supra Note 18.
32
See Stoll (1972), p.63, no. 64.
33
This formof compensation is generally considered to be restitution in natura in a broader sense. This provision
was introduced on the grounds that the victim cannot be expected to agree that the tortfeasor undertakes himself
the repair of the thing (Lange & Schiemann, 2003, p. 226). This amount, however, may consist in the costs of
replacement of the thing (Schiemann, 1998, 249, pp. 154155, no. 213). This provision does not apply in cases
where the thing is destroyed (see among others Schiemann, 1998, 249, pp. 156157, no. 218).
536 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
In practice in the vast majority of cases, the victim exercises his right stemming from
Article 249, sentence 2 and is routinely awarded the costs of repair or replacement,
34
thus
excluding the possibility of bargaining. This behavior on the part of the victim is perfectly
rational; this is the maximum amount of compensation he can receive. In addition, since
there are no restrictions as to its use, he can invest it into any activity he wishes. This way, in
case his subjective valuation is lower than the repair costs, he is better off after the accident
than before. This, however, results in systematic overcompensation of the victim and leads
to the distortion of the incentives of both parties.
The distortion of the incentives of the parties is strengthened by the fact that courts
award repair costs even for things, which the victim cannot repair because he no longer
owns them.
35
The German legal term for this type of damages is ktive Reparaturkosten
and can be rendered in English as ctitious damages. This issue is being disputed for a
long time.
36
According to the opinion, which nally prevailed in the court decisions, repair
costs should be awarded independently of the actual possibility of repair.
37
It is claimed that
the repair of the car is the only meaningful way to deal with the damage. Thus, the damage
which occurred is objectivized and set equal to the repair costs. A further justication is
based on the argument that the owners of damaged things should be treated equally, no
matter whether they intend to repair the thing or sell it as is, since their intentions are of no
interest to the court.
38
At this point, it is worth noting that a special provision was recently
added to Article 249, according to which the value added tax (VAT) is not included in the
compensation unless it is actually paid.
39
The recovery of the VAT, in cases where no repair
had taken place, is a ctitious damage and preventing its recovery is reasonable. However,
it is difcult to understand why the reform is restricted to this particular issue and does not
treat other similar matters along the same lines.
40
A deviation from the principle of restitution in natura is introduced by Article 251 of the
German Civil Code, when restitution in natura is impossible or disproportionally costly.
In such cases, the victim is entitled to money damages consisting in the diminution of the
market value of the thing.
41
This provision is logically necessary when restitution in natura
is impossible. The notion of disproportion on the other hand is rather vague. Nevertheless,
it has been interpreted by courts in a concrete way.
42
The rule is particularly clear in case
34
See Medicus (2000), p. 275 and Magnus (1987), p. 29.
35
See Magnus (1987), p. 58 and Magnus (2001), p. 105.
36
See, among others, Lange and Schiemann (2003), pp. 230231.
37
On the analysis of the tendencies of the courts on this matter, see Magnus (1987), pp. 5960, where it is
mentioned that in 1976 The Highest Court decided that repair costs are awarded only if it is possible for the victim
to perform the repair; if not, article 251 BGB applies (BGH 23.3.1976, Entscheidungen des Bundesgerichthofs in
Zivilsachen 66, p. 239), but in 1985 the practice of the courts changed (BGH 5.3.1985, Versicherungsrecht 35, p.
593).
38
For a more detailed exposition of this argumentation and the criticismagainst it, see Magnus (1987), pp. 6065.
39
See Zweite Gesetz zur

Anderung schadensersatzlicher Vorschriften of 19.7.2002 (Bundesgesetzblatt I, p.
2674).
40
Lange and Schiemann (2003), pp. 232233.
41
Precisely, the compensation of the provision of Article 251 is calculated on the basis of the difference theory
in its objective version, which more or less coincides with the diminution of the value of the thing. See Magnus
(2001), p. 96.
42
See Medicus (2000), p. 278.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 537
of car damages. In these cases, a repair is considered to be disproportional when it exceeds
by 30% the value of the car before the damage.
43,44
Nevertheless, such a rigid in abstracto
interpretation is arbitrary and as such cannot be easily justied.
3.2. England
In English Common Law, tort damages are always monetary.
45
Restitution in natura is
hardly an option in tort law. The judge can by means of a mandatory injunction compel the
tortfeasor to perform an act, but this has no application in the case of accidents.
46
English
courts are reluctant to order such measures, which they hold as interfering with the liberty
of the defendant.
47
Money damages are in principle meant to cover the diminution of the value of the thing.
48
Nevertheless, in the case of the destruction of a thing the courts may award the costs of
replacement, if the plaintiff intends to replace the thing and this is reasonable.
49
In the case,
where the thing can be repaired, the costs of repair serve as a prima facie rule for the process
of the diminution of the value of the thing,
50
provided that they are also reasonable.
51
The
extent to which this prima facie rule is reversed in practice is unclear.
52
In the Glennlas
case,
53
the plaintiff received repair costs, even though he admitted before the court that he
does not intend to repair his vessel. The main argument supporting this practice is that, in
such cases the diminution of their price of the thing cannot be assessed because there is
no market for damaged things.
54
In this context, ctitious damages have also been often
compensated.
55
This practice, however, has been heavily criticized
56
and nowadays there
seems to be a tendency to abandon it.
57
43
See Magnus (2001), p. 106 and Schiemman (1998), 251 BGB, p. 180, no. 2226.
44
This issue also involves the comparison between the value of the thing and the replacement costs, which,
however, exceeds the scope of this paper.
45
See Stoll (1972), p. 63, no. 6465.
46
See Rogers (2001), p. 58 and Stoll (1972), p. 65, no. 65.
47
For this problem in the context of contract law, see Schwartz (1979), p. 296298.
48
See Mc Gregor (1997), p. 44, no. 68 and Rogers (2001), p. 62.
49
See Tettenborn, Wilby, and Bennett (2003), p. 269 and Allen, Hartshorne, and Martin (2000), p. 156, no. 6-035,
who, however, do not refer to the intentions of the plaintiff.
50
See Mc Gregor (1997), pp. 4445, no. 68.
51
The criterion of reasonableness is examined in concreto. A usual case where it is considered that repair
costs are reasonable is when they exceed substantially the pre-accident value of the thing or they are obviously
disproportionate to the diminution of the value of the thing but they should not be disproportionate. See Tettenborn
et al. (2003), p. 281; Allen et al. (2000), p. 159, no. 6-043; Magnus (1987), p. 72.
52
See Rogers (2001), p. 65.
53
The (1918) Probate, Divorce and Admiralty (Law Reports,) p. 363.
54
See Rogers (2001), p. 75.
55
See Mc Gregor (1997), p. 870, no. 1326. This is evident in the London Corporation case (The (1935) Probate,
Divorce and Admiralty (Law Reports) p. 70) where the plaintiff received repair costs for his ship, although he had
sold it before the trial.
56
See Tettenborn et al. (2003), p. 282, who cite the view expressed by the obiter in the Court of Appeal in the
case Apostolis (No 2), The (2000) 2 Lloyds Law Report, pp. 337, 348.
57
See Tettenborn et al. (2003), p. 282, referring to the Argonaftis case (The (1989) 2 Lloyds Law Reports, p.
487). This reasoning is irreconcilable with that of the Glennlas case and as the rst case is a more recent one it
should prevail.
538 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
Overall, in England there seems to be a concern that the tailoring of damages should
take into account the intentions of the plaintiff. Nevertheless, with the exception of the
cases where the plaintiff has already restored the damage or the restoration is rendered
impossible before the trial, there is no way to ascertain the intentions of the victim and
make him commit himself to the way in which he will dispose the money damages. Thus,
the plaintiff usually claims and receives repair or replacement costs, which is rather an
indication of overdeterrence.
3.3. France
The French Civil Code does not contain any explicit provision about the formof compen-
sation in case of torts. The judge is free to decide on the remedy, which he considers appropri-
ate for each specic case, without being bound by the demand of the parties.
58
The enforce-
ment of restitution in natura seems to contradict to Article 1142 CC, according to which
in case of non-performance every obligation to act or refrain from an act results in money
damages.
59
Nevertheless, this provision has been interpreted so narrowly that it prevents
execution only when this would be directed expressly against the person of the defendant.
60
In practice, although a number of court decisions where the defendant was compelled to
actually repair or replace a damaged thing can be retrieved,
61
courts usually award money
damages.
62
In the case of the destruction of a thing, according to the prevailing view, money
damages are calculated on the basis of the replacements costs.
63
Nevertheless, depending
on the circumstances the judge may decide in favor of the diminution of the (market) value
of the thing.
64
When on the other hand, repair is possible, money damages cover its cost.
65
Moreover, although the compensation of ctitious damages is in theory denied,
66
not all
court decisions point to the same direction.
67
The repair costs may outrun the pre-accident
value of the thing.
68
However, they cannot exceed the costs of the replacement of the thing,
if replacement is a possibility.
69
The examination of the relation between the replacement
and the repair of the thing exceeds the scope of this paper.
70
Nevertheless, it is worth noting
58
See Starck, Roland, and Boyer (1996), p. 517; Le Tourneau and Cadiet (2002), p. 615, no. 2448; Viney and
Jourdain (2001), p. 87 no. 39; Terr e, Simler, and Lequette (1999), p. 794, no. 858 who seem to restrict the liberty
of the judge to decide for restitution in natura in the cases where at least one party has asked for it.
59
See Stoll (1972), p. 68, no. 69.
60
See Stoll (1972), p. 68, no. 69; Le Tourneau and Cadiet (2002), p. 615, no. 2449; Terr e et al. (1999), p. 794,
no. 858.
61
See Le Tourneau and Cadiet (2002), p. 615, no. 2450 and Viney and Jourdain (2001), p. 59, no. 28-1.
62
See Viney and Jourdain (2001), p. 107, no. 56.
63
See Le Tourneau and Cadiet (2002) p. 635, no. 2529.
64
See Viney and Jourdain (2001), p. 184, no. 95 who refer to a case where the owner of the damages thing had
not used it for a long time and it was improbable that he would use it ever again.
65
See Galand-Carval (2001), p. 82 and Le Tourneau and Cadiet (2002), p. 636, no. 2530.
66
See Galand-Carval (2001), p. 87 and Viney and Jourdain (2001), p. 184, no. 95.
67
See Magnus (1987), pp. 7071 with references to court decisions.
68
See Galand-Carval (2001), p. 87.
69
See Magnus (1987), p. 54; Le Tourneau and Cadiet (2002), p. 636, no. 2530; Viney and Jourdain (2001),
pp.186187, no. 96. Nevertheless, it is worth mentioning that the penal department (Chambre Criminelle) of the
Court of Cassation does not follow this restriction.
70
See supra Note 7.
E. Zervogianni / International Review of Law and Economics 24 (2004) 525541 539
that the evaluation of such a rule depends on what is understood as a replaceable thing.
If this only refers to standardized commercial goods, it is rather unproblematic since it is
likely that the costs of replacement and the subjective loss of the victim coincide in which
case repair would be rather superuous. This is not so if the damaged good is an experience
good (e.g. car).
In general, although the effect of overdeterence discussed above in the context of German
law seems to be present in France too, the French rule on the tort remedies is exible and
as such is in accordance with the normative proposition. Thus, it could lead to satisfactory
results if it were interpreted adequately.
4. Conclusion
To sum up, the choice of the tort remedy can inuence the nal amount of compensation
owed and induce both parties to adjust their level of care and activity accordingly. The
efcient result would occur if compensation coincided with the subjective damages of the
victim. Since, in reality the victim will never reveal his true subjective valuation, this is
not feasible. Hence, the second best solution is to apply the tort remedy, which can lead to
the closest approximation of the ideal result. This remedy is not necessarily the same for
all cases, but can vary according to the height of the subjective costs of the victim. To the
extent that third parties (i.e. the judges) can roughly identify the different types of cases,
exibility of the legal system is really important.
In practice, despite the differences of the rules in place in the legal systems examined,
in the vast majority of the cases, the victim receives monetary compensation amounting
to the costs of repair or replacement of the damaged thing and has the freedom of its
disposition, which leads in principle to systematic overcompensation of the victim, followed
by overdeterrence of the tortfeasor. The possibility and the importance of ex post bargaining
of the parties, to which the application of the rule of restitution in natura would result,
received no recognition.
Understanding the effects of different institutions becomes increasingly more important,
considering the contemplated drafting of a European Civil Code. It is worth mentioning
that according to Article 6:101 (2) of the Draft on Tort Law of the Study Group on a
European Civil Code,
71
Reparation may be in money (compensation) or otherwise, as is
most appropriate, having regard to the kind and extent of damage suffered. This rule is in
the right direction. It conforms to the normative proposition of the paper, but the extent to
which it may lead to satisfactory results depends on its interpretation
72
.
Further research on this topic needs denitely to be carried out. A next step would be the
modeling of the effects of the different tort remedies taking into account the probability of
settlement. Another important extension of this paper would concern the impact of insurance
on the current analysis. Finally, the cases where the costs of repair or replacement exceed
the pre-accident value of the thing as well as those where the costs of repair exceed the
costs of replacement merit further examination.
71
Current version (June 2004) as retrieved from http://www.sgecc.net/media/download/04 06tort.pdf.
72
cf., however, Article 6:201 of the Draft.
540 E. Zervogianni / International Review of Law and Economics 24 (2004) 525541
Acknowledgements
The support given by the Graduiertenkolleg Recht und

Okonomik (University of Ham-
burg) and the European Commissionin the framework of the Marie Curie Fellowship
Programis gratefully acknowledged. I would further like to thank Aristides Hatzis,
Giuseppe Dari Mattiacci, Francesco Parisi, Thomas Ulen, Georg von Wangenheim, and
two anonymous referees for helpful comments. I am also indebted to Youlika Kotsovolou
Masry for her valuable editorial comments.
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