Comparative law and economics fuses two distinct terms: “comparative law” and “law and economics.” Before we settle on the conceptual meaning of “comparative law and economics,” it is important to explore these two terms separately.

a) Law and economics

By “law and economics,” one is referring to the field of study that uses the tools of microeconomics to study the law. For example, consider negligence liability in the context of tort law: there has been an accident, a victim has been injured and an injurer has been identified. Under tort law, a court ought to find the injurer liable for money damages to compensate the victim if that injurer failed to take “reasonable care.” If the injurer did take reasonable care or if the victim failed to take her own reasonable care, then the injurer ought not to be liable. The economic view of negligence provides a more precise view of what care should count as “reasonable.” According to law and economics, the social costs of accidents will be minimized if actors invest in “cost-justified precaution.” “Cost-justified precaution” is a precaution in which the cost is less than the expected accident losses; this precaution prevents an accident or mitigates losses.

To further illustrate, suppose that there has been an accident involving two motorists. One of whom is clearly the injurer; the other, the victim, has suffered losses (such as damage to her car, medical expenses for her own injuries and lost income from an inability to work). The injurer will be held liable to the victim for her damages if the precaution that would have prevented the accident (such as not speeding or obeying the traffic rules) cost less than the probability that the accident would have occurred times the victim's losses, and the injurer did not take that precaution. If he did take the precaution but an accident happened anyway, he will be (or should be) excused from negligence liability for the victim's losses. The victim will have to bear her own losses.

Where a more traditional legal analysis narrows in on what should happen if there is litigation, as in the example above, law and economics focuses on how law can influence preaccident behavior so that accidents are far less likely to happen or are less injurious if they do occur.