The Proportional Internalization Principle in Private Law

Abstract

According to common conception, laws should make actors internalize all the costs and benefits of their actions to make them behave efficiently. This article shows that even when only partial internalization is possible, private law can create efficient incentives by ensuring that each actor internalizes an identical proportion of the costs and benefits. This proportional internalization principle has profound implications. In tort law, it offers a new mechanism for dividing liability between multiple parties. In contract law, it suggests a new default rule for joint ventures. And, in restitution law, it presents an alternative doctrinal formulation for restitution for unrequested benefit.