A New Perspective on an Old Problem: Negligence, Strict Liability, and Non-Legal Sanctions

Abstract

In this article, I compare negligence and strict liability regimes with respect to their different abilities to generate the imposition of non-legal sanctions on defendants in torts. I evaluate the relative desirability of the two regimes from the perspectives of efficiency, distributive justice, and other justice considerations, while distinguishing between reputation loss produced by the litigation process and that produced by the defendant's underlying activity that caused the accident. My analytical framework is grounded in the following insights: First, non-legal sanctions can be value-destroying, value-preserving, or value-creating. However, it is hard to empirically determine the extent to which a given finding of liability produces any of these effects. This difficulty affects the ability to normatively evaluate the two regimes. Second, non-legal sanctions have a dual character - on the one hand, as a type of sanction imposed in response to the damage caused by the defendant and, on the other hand, as possibly an undesirable social cost (when the non-legal sanctions are value-destroying) or a desirable social benefit (when the non-legal sanctions are value-creating). Third, and most important, any given finding of a defendant as liable in torts is likely to subject her to greater non-legal sanctions if reached under a negligence regime than if reached under a strict liability regime. However, it is not clear which regime will produce greater non-legal sanctions overall, since a strict liability regime is likely to produce more findings of liability. The main distinction between the rival regimes' respective potential to generate non-legal sanctions derives from the fact that, in findings of liability, a strict liability regime pools together negligent and non-negligent defendants. At both the allocative and distributive levels, this pooling effect is likely to lead to a reduction in the investment made by high-risk professionals in precaution costs. Low-risk professionals might either increase their investment in precaution (as the flip-side of this adverse selection coin) or, like the high-risk professionals, reduce that investment in a tragedy-of-the-commons. A strict liability regime might serve as a hedging mechanism for low-risk professionals against the significant reputation loss involved in being found liable under a negligence regime. At the aggregate level, a strict liability regime will produce greater non-legal sanctions if market participants overestimate the proportion of faulty defendants out of the pool of defendants found liable under that regime. Finally, the paper critically examines the assumption that a negligence regime is superior to strict liability in terms of signaling.