The Externality of Victim Care

Abstract

In a world with no transaction costs, tort law would not be necessary. Instead, injurers and victims would bargain among themselves to produce the mix of activities and care that would maximize their own and thus society's wealth.1 Of course, transaction costs do exist, and they are of sufficient magnitude to prevent bargaining between injurer and victim: for example, pedestrians cannot identify and write contracts with each driver that might injure them. In this real world, the economist's ideal regime of tort law would generate liability rules that induce injurer and victim alike to choose the activities and levels of care they would have chosen in a world without transaction costs.3 For three decades, lawyers and economists have expended significant effort evaluating the economic consequences of various common law liability rules. In so doing they have sought to determine which liability rule(s), if any, will maximize social wealth, that is, induce injurers and victims to replicate the mix of care and activities for which they would have bargained in the absence of transaction costs.4 This