Liability Standards with an Uncertain Outcome at Trial

Abstract

We model a negligence standard where the defendant’s level of care is viewed with error by the judicial system. All cases are assumed to settle prior to trial, but the negotiated outcome reflects the expected outcome at trial. The policymaker may or may not be able to induce the optimal level of care on the part of the defendant. The optimal negligence standard bears no necessary relationship to the optimal level of care. As the standard of care rises to infinity, the outcome under the negligence standard approaches the outcome under strict liability. The level of care which may be achieved under the negligence standard is (asymptotically) at least as high as under strict liability and may be higher. Consequently, the level of social welfare under an optimally chosen negligence standard is at least as high as under strict liability and may possibly be higher. It should be noted, however, that if the defendant is made liable for the plaintiff’s pretrial legal costs, strict liability will induce the defendant to choose the optimal level of care.