Potential Injurers Research Articles

The Many Faces of Negligence

Negligence law is built around the paradigmatic case of a person who unreasonably preferred his own interests to those of others and, as a result, caused damage to another person. However, this case is not representative of all instances of negligence. In some cases, the negligent injurer failed in balancing between the interests of the victim alone; in other cases, he failed in balancing between the victim’s interests and those of a third party; sometimes the injurer failed in balancing the victim’s interests and the interests of the public or of society as a whole; and in yet other instances, he failed in balancing between his own interests. This article argues that the law should not treat in the same manner the different types of instances of failure in balancing between interests. Both justice and deterrence considerations mandate different treatment for the different types of instances, in accordance with the type of interests that the negligent injurer failed to balance. The article focuses on the typical types of balances of interests that the potential injurer is required to conduct before taking action, with the aim of determining the degree to which it is crucial to impose tort liability in each type of case. The article also examines whether prevailing negligence law is compatible with the thesis developed in the article and proposes tools for achieving such compatibility.

Minimum Asset Requirements

Requirements that parties have assets of at least a minimum level in order to participate in an activity are frequently imposed. A principal rationale for minimum asset requirements is considered in this article potential injurers have stronger incentives to prevent harm, or not to engage in harmful activities, provided that they have at least the required level of assets at stake if they are sued for causing harm. The optimal minimum asset requirement generally reflects a tradeoff between this advantage and the disadvantage that some parties with assets below a required level ought to engage in the activity (because the benefits they would obtain exceed the expected harm they would cause). Additionally, it is emphasized that minimum asset requirements are socially desirable only when the victims of harm are not customers of firms. When victims of harm are customers of firms, minimum asset requirements are socially undesirable.

AN ECONOMIC ANALYSIS OF A HYBRID LIABILITY RULE

This article considers a legal setting with a tort liability rule that includes both a care‐based component (such as negligence) and a non–care‐based component (such as no liability). Children trespassers are sometimes protected by a doctrine known as attractive nuisance. Attractive nuisance acts as a hybrid liability rule in its application—it applies the negligence rule to accidents involving some types of children, and the no‐liability rule to accidents involving other types of children. A standard economic model of torts is applied to a trespass setting, and the potential efficiency of a hybrid liability rule is examined.

Welfare Implications of Costly Litigation under Strict Liability

This article examines a model of strict liability with costly litigation and presents conditions under which (1) potential injurers take optimal precautions, (2) increasing the cost of litigation enhances precaution and social welfare, (3) the optimal level of liability exceeds the compensatory level, and (4) increasing the rate of settlement enhances social welfare. The results have implications for controversies surrounding fee shifting, optimal damage awards (e.g., punitive damages), and the social desirability of settlement. The most striking implication is that fee shifting in favor of prevailing plaintiffs is socially desirable in low‐transaction‐cost settings.

Legal cost insurance and social welfare

Private legal cost insurance can come into being even when all individuals are risk-neutral, as being insured strengthens the strategic position of victims vis-à-vis potential injurers. Legal cost insurance may increase social welfare, but need not do so.

The Principle of Full Compensation in Tort Law

According to the principle of full compensation, tort law seeks to put the victim in the position he was in before the tort. This position is generally considered to be the situation where the victim does not suffer any harm at all. We consider an alternative interpretation. If an injurer takes due care, the victim is faced with expected harm. This can be considered the victim's expected harm in the situation he was in before the tort. Thus conceived “full compensation” requires a negligent injurer to pay damages which bring the (potential) victim ex ante in the same position as the victim was in the case where the (potential) injurer takes due care. We investigate the consequences of this restated negligence rule. For due care levels larger than efficient care, the standard negligent rule may lead to excessive care, whereas the restated negligent rule always leads to efficient care. Furthermore, the activity level under the restated negligent rule is greater than the activity level under the standard negligent rule, which itself is greater than the efficient activity level. Social welfare under the restated negligence rule can either be higher or lower than social welfare under the standard negligence rule.

An Economic Analysis of the American and the Continental Rule for Allocating Legal Costs

A well-known conclusion from the standard model of litigation is that a transition from the American to the Continental rule for the allocation of legal costs will lead to an increase in the number of trials. The standard model, however, neglects the fact that the rule for allocating legal costs may also influence whether or not a potential injurer engages in a harmful activity. When this choice is endogenized, the conclusion derived from the standard model does not appear to be generally valid. A transition from the American to the Continental rule may lead to a decrease in the number of trials. Furthermore, the transition may result in an improvement in efficiency.

Welfare Implications of Costly Litigation Under Strict Liability

This paper examines a model of strict liability with costly litigation, and presents the conditions under which: (1) potential injurers take optimal precautions, (2) increasing litigation costs enhance precaution and social welfare, (3) the optimal level of liability exceeds the compensatory level, and (4) increasing the rate of settlement increases social welfare. The results have implications for controversies surrounding optimal damage awards (e.g., punitive versus compensatory), fee shifting, and the desirability of settlement.

Managerial Judges: An Economic Analysis of the Judicial Management of Legal Discovery

I analyze the effect of procedural rules that permit judges to limit pretrial discovery. In the presence of asymmetric information, a litigant may forgo settlement before discovery if his opponent interprets a serious offer as a sign that her discovery is likely to uncover useful evidence, leading her to invest more in discovery. Furthermore, a litigant may forgo settlement in order to strengthen his or her threat of future discovery. I show that by limiting pretrial discovery, the judge can simultaneously increase the probability of early settlement and reduce expected litigation costs, without reducing potential injurers' incentives to take care.

Limited liability and the requirement to purchase insurance

This paper seeks to answer the question whether or not compulsory liability insurance can eliminate the distortions caused by limited liability of potential injurers. The purpose of compulsory liability insurance is to control care and payment. In particular, we ask whether or not the requirement to purchase liability insurance coverage may restore the proper incentives to the injurer (the deterrence effect), provided that victims have adequate coverage (the compensation effect). We argue that the externalities due to the injurers' lack of assets may be alleviated, if insurance coverage is mandatory.

Optimal Awards and Penalties When the Probability of Prevailing Varies Among Plaintiffs

This article derives the optimal award to a winning plaintiff and the optimal penalty on a losing plaintiff when the probability of prevailing varies among plaintiffs. Optimality is defined in terms of achieving a specified degree of deterrence of potential injurers with the lowest litigation cost. Our main result is that the optimal penalty on a losing plaintiff is positive, in contrast to common practice in the United States. By penalizing losing plaintiffs and raising the award to winning plaintiffs (relative to what it would be if losing plaintiffs were not penalized), it is possible to discourage relatively low-probability-of-prevailing plaintiffs from suing without discouraging relatively high-probability plaintiffs, and thereby to achieve the desired degree of deterrence with lower litigation costs.

Optimal Awards and Penalties When the Probability of Prevailing Varies among Plaintiffs

This article derives the optimal award to a winning plaintiff and the optimal penalty on a losing plaintiff when the probability of prevailing varies among plaintiffs. Optimality is defined in terms of achieving a specified degree of deterrence of potential injurers with the lowest litigation cost. Our main result is that the optimal penalty on a losing plaintiff is positive, in contrast to common practice in the United States. By penalizing losing plaintiffs and raising the award to winning plaintiffs (relative to what it would be if losing plaintiffs were not penalized), it is possible to discourage relatively low-probability-of-prevailing plaintiffs from suing without discouraging relatively high-probability plaintiffs, and thereby to achieve the desired degee of deterrence with lower litigation costs. This result is developed first in a model in which all suits are assumed to go to trial and then in a model in which settlements are possible.

Disclosure of Information and Incentives for Care

This article studies discovery rules that govern pretrial disclosure of private information in legal disputes. We analyze the effect of discovery rules on the incentives for accident prevention by potential injurers. Two discovery procedures are considered: Under private disclosure, the plaintiff has the right to compel discovery (e.g., with the help of an expert). Under public disclosure, the plaintiff can ask for discovery by a public authority. We argue that if government officials act in the public interest, public administration in best suited to compel the disclosure of private information.

Should Liability Be Based on the Harm to the Victim or the Gain to the Injurer?

Should the level of liability imposed on an injurer be based on the harm he caused or instead on the gain he obtained from engaging in the harmful act? The main point of this article is that there is a strong reason to favor liability based on harm rather than gain when account is taken of the possibility of legal error. Notably, even a small underestimate of gain can lead an injurer to commit a harmful act when the harm greatly exceeds his gain, causing a large social loss. In contrast, a comparable error in the estimate of harm will not lead an injurer to engage in the harmful act when the harm significantly exceeds his gain. The general superiority of harm-based liability is shown to hold under the rules of negligence and strict liability and regardless of whether potential injurers know the error that will be made.

Liability and the Incentive to Obtain Information about Risk

OPPORTUNITY often exists for parties to obtain information about the risks that they create and thereby to reduce the risks. Firms may study possible product defects and be able to ameliorate them; individuals may investigate various dangers for which they are responsible and act on what they learn. The questions addressed in this article concern the incentives that the prospect of liability creates for potential injurers to obtain information about risks and whether these incentives are socially appropriate.' In the model to be considered, information is of a simple character. It reveals either that there is risk or that there is not. (For example, the test of a product reveals whether or not it has a tendency to break apart at a suspected weak point.) To determine if it is socially desirable for a party to acquire information

Uncertain Litigation and Liability Insurance

Legal penalties and liability insurance seem to have counteracting effects on the incentives of a potential injurer to take due care. However, if legal penalties are set efficiently and implemented perfectly, unrestricted access to insurance can be optimal. In contract, if the standards of guilt assessment are uncertain, the size of the legal penalties may act as a spur to litigation. Therefore, the penalties required to maintain incentives when access to insurance is unlimited may provoke too much litigation, and as a consequence, the costs of ensuring due care may decline when insurance is restricted by mandate.

The influence of litigation costs on deterrence under strict liability and under negligence

This paper examines the influence of litigation costs on deterrence under strict liability and under negligence. By deterrence, I refer to the effect of the threat of liability on the care exercised by potential injurers.’ More precisely, this paper takes litigation costs as given and examines the social desirability of the levels of care exercised under negligence and under strict liability.2 The relationship of this paper to the existing literature examining the influence of litigation costs on incentives under a liability system can best be described by comparing its focus to two fairly recent papers.’ Shave11 (1982) examines whether plaintiffs bring suit when bringing suit is socially desirable in a regime in which litigation is costly. Polinsky and Rubinfeld (1988) examine whether the level of liability is socially optimal in a regime in which litigation is costly. This paper examines whether the level of care is socially optimal in a regime in which litigation is costly. The major result presented in this paper is that strict liability leads to underdeterrence when litigation costs are taken into account. The intuition behind this conclusion is straightforward. Optimal deterrence requires that all external costs resulting from the injurer’s failure to take care be “internalized” to the injurer. But if litigation is costly, two types of external cost will not be internalized under strict liability: the litigation cost “imposed” on victims who choose to sue; and the losses suffered by victims who choose not to sue because the cost of litigating exceeds the anticipated damage award. The negligence rule also leads to underdeterrence when litigation costs are taken into account. Specifically, if agents have rational expectations and the jury is perfectly informed, then in equilibrium a negligence regime must underdeter. The

The Economic Structure of Tort Law

Written by a lawyer and an economist, this is the first full-length economic study of tort law--the body of law that governs liability for accidents and for intentional wrongs such as battery and defamation. Landes and Posner propose that tort law is best understood as a system for achieving an efficient allocation of resources to safety--that, on the whole, rules and doctrines of tort law encourage the optimal investment in safety by potential injurers and potential victims. The book contains both a comprehensive description of the major doctrines of tort law and a series of formal economic models used to explore the economic properties of these doctrines. All the formal models are translated into simple commonsense terms so that the math less reader can follow the text without difficulty; legal jargon is also avoided, for the sake of economists and other readers not trained in the law. Although the primary focus is on explaining existing doctrines rather than on exploring their implementation by juries, insurance adjusters, and other real world actors, the book has obvious pertinence to the ongoing controversies over damage awards, insurance rates and availability, and reform of tort law-in fact it is an essential prerequisite to sound reform. Among other timely topics, the authors discuss punitive damage awards in products liability cases, the evolution of products liability law, and the problem of liability for mass disaster torts, such as might be produced by a nuclear accident. More generally, this book is an important contribution to the law and economics movement, the most exciting and controversial development in modern legal education and scholarship, andwill become an obligatory reference for all who are concerned with the study of tort law.

Litigation, liability, and incentives for care

In this paper, potential injurers are subject to a negligence standard and differ in cost of taking care; in the event of accident, the injurer's degree of care is private information in litigation that follows. Award of damages for pain and suffering will lead to a general increase in care and hence reduce the likehood of accident. A tighter negligence standard will lead some potential injurers to take more care and others to take less. Adoption of a rule under which the loser at trial must pay the litigation costs of the winner will reduce the pressure for punitive damages.

Tort versus no-fault: Compensation and injury prevention

The tort system, as a means of compensating the victims of injury, no longer fulfills the purpose for which it was intended. The attempt to achieve a fair and rational method of compensation, especially in the areas of medical malpractice and products liability, has been displaced by a form of litigation lottery which permits attorney's fees to divert great amounts of money from victims in needs. A reform of this system is much in need and long overdue. Following a discussion of these and other problems with the tort system, this paper will present a method for ensuring the prompt settlement of most personal injury claims through payment of the victim's net economic losses. The parallels to no-fault auto insurance and workers' compensation are examined and attention is given to the likely impact of this proposal on the conduct of potential injurers and victims.