Causation and Incentives to Choose Levels of Care and Activity Under the Negligence Rule

Abstract

Standard economic analysis of tort law shows that the causation requirement does not affect the operation of the negligence rule in a perfect world, but does so in an imperfect world. While the standard analysis has focused exclusively on care models, this paper analyzes the impact of the causation requirement in more realistic models of care and activity. This paper shows that in these settings the causation requirement is still of no consequence in a perfectly operating world; however, under imperfect conditions, the qualitative impact of the causation requirement depends on the type of the precautionary measure and its relationship to the activity level. If care and expected harm are linear in activity levels, then causation alters the basic results. For example, it is shown that if due care is set at incorrect levels (a reasonable person rather than an individualized standard), then causation is not necessarily socially desirable; and that it is socially detrimental under conditions of systematically mis-estimated harm. On the other hand, if the precautionary measure is perfectly durable – i.e., its costs are independent of the activity level – then the basic qualitative results are not changed. For example, setting due care slightly higher than first-best optimal care induces injurers to abide by the due care standard. In addition, slight errors in estimating damages do not affect injurers’ adherence to the due care standard.