TOPIC IS IN THE ECONOMICS OF TORT LIABILITY (from COOTER, ULEN Introduction to Law and Economics 2000 (3rd ed))

Transcription

1 TOPIC IS IN THE ECONOMICS OF TORT LIABILITY (from COOTER, ULEN Introduction to Law and Economics 2000 (3rd ed)) Let us advance the understanding of the economic analysis of the tort-liability in two ways. A.RELAXING THE CORE ASSUMPTIONS Before we implicitly made five simplifying assumptions: 1.Decision-makers are rationally self-interested. 2.There are no regulations designed to reduce external cost. 3.There is no insurance. 4.All injurers are solvent and pay damages in full. 5.Litigation costs are zero. The purpose of this section is to relax these assumptions and to see the effect, if any, on the conclusions from the economic theory of tort liability. Rationality One of the central assumptions in economic theory is that decision-makers are rationally self-interested. As a technical matter,this means that decision-makers have stable, wellordered preferences, which implies something about the decision maker s cognitive and reasoning abilities. There is a vital connection between the assumptions of rationality and the economic model of tort liability. We saw that the rules for assigning tort liability are, economically speaking, designed to send signals to potential victims and potential injurers about how they ought to behave. For the tort-liability system to have this effect, it must be the case that those whose behavior the law is seeking to affect are rational: they must be able to perceive that they can minimize their liability by taking precautionary actions of particular kind and amount. Regulations Fire regulations usually require a store to have a fire extinguisher. If the store complies and a fire injures a customer, the store may be liable. The basic model assumed that injurers face liability but not regulations. Comparing liability and regulation, sometimes one is more efficient than the other,and sometimes the two together are more efficient than either one by itself. A general theory of safety regulation and tort liability must distinguish these alternatives. We will sketch some determinants. Regulation is ex ante enforcement by administrators, and liability is ex post enforcement by victims. This difference determines many of the advantages and disadvantages of each. Administrators and courts differ with respect to information. Administrators can often acquire technical knowledge needed to evaluate the safety of specialized industries, whereas courts of general jurisdiction have difficulty accumulating technical knowledge about specialized industries. In these circumstances, administrators may set standards better than courts. If safety regulation and liability law impose the same standard of care, then potential injurers will conform to it in order to avoid ex ante fines and ex post liability. Courts may feel that the regulators set the standard too low in order to avoid liability for politically powerful

2 businesses. If safety regulations provide a rich source of bribes for corrupt officials in many countries. When tort liability exceeds an injurer s wealth, the injurer is bankrupt. Finally, consider the administrative costs of regulations and liability. Sometimes accidents impose small harm on a large group of people. When the cost of trial for each victim exceeds his damages, making liability law work requires aggregating claims, as in a class action suit. Sometimes claims are easier to aggregate in an administrative proceeding than in a court trial. Insurance Our goal was to minimize the cost of accidents, preventing, accidents, and insurance. A rule of no liability prompts victims to insure themselves. If potential victims insure themselves, then the efficiency of the tort-liability system might suffer in two ways. First, accident victims might receive compensation from insurance companies rather than injurers. Second, insurance might discourage the potential victim from taking care to prevent the accident a reaction that creates a moral hazard. Because of these two effects, insurance by victims might cause more accidents than the social optimum. There are, however, reasons why these two effects may not occur. First, the victim s insurance contact usually includes a subrogation clause that assigns to the insurance company any cause of action that the insured party may have against the injurer. Second, insurance companies are well aware that insurance can undermine the incentive of victims to take precaution. To minimize the moral hazard, insurance contracts provide for co-insurance or deductibles. Under a deductible, the insured pays a fixed dollar amount of the insured loss. Under co-insurance, the insured pays a fixed percentage of the insured loss. Insurance companies also increase rates after a policyholder files a claim. Instead of a rule of no liability, the tort system can impose a rule of strict liability. Liability insurance blunts the incentives of injurers to take precaution. In the 19 th century, consumers injured by defective products seldom recovered in court,so consumers who wanted insurance had to buy it themselves. In the 20 th century, the emergence of strict product liability in tort law effectively caused manufacturers to insure consumers. The tort liability system effectively provides consumers with insurance against pain and suffering that they would not buy for themselves. In contrast, some argue that the rule of strict liability has a distinct advantage over no liability in terms of the information available to insurance companies. Insurance companies set rates according to the history of claims. These contrasting arguments suggest the absence of a simple answer to the question of whether accident victim s insurance or liability insurance is more efficient. A crisis over liability insurance occurred in most countries. The crisis poses the question: Is the insurance industry inherently unstable? The answer may be YES for two reason. The first reason concerns the reserves held by an insurance company. For some insurance risks, many claims can occur at once. If an insurance company has excess reserves, it can expand the supply of insurance at little cost. One theory holds that insurance crises occur because insurance companies exhaust their reserves. The second explanation of the insurance crisis holds that increased claims sot off a cascade of increased premiums due to adverse selection. Bankruptcy Strict liability causes the firm to internalize the social cost of accidents, so it chooses the socially optimal activity and care levels. The possibility of escaping liability through bankruptcy changes this conclusion. When potential damages to tort victims exceed the firm s net worth, it externalizes part of the risk, thus eroding its incentives to take precaution and restrain its activity level. Limited liability can cause too little precaution and

3 too much dangerous activity. The firms in risky industries will have too many accidents and too little capital, thus lowering production and distorting the capital-labor ratio. In addition, if tort liability causes bankruptcy and liquidation, the firm s nontransferable assets are destroyed, such as its name, organization, and its employees knowledge of how the company conducts business. A recent article, however, proposes that new judgmentproofing techniques enable corporations to avoid tort liability without being undercapitalized. First, a corporation can place risky activities in a subsidiary, which is a separate company owned by parent corporation. Second, in bankruptcy the secured creditors get priority over other creditors, including tort victims. Third, firms often have expected income, such as future payments from buyers of the firm s products. In a process called securitization, firms convert expected income into securities and sell them to investors such as banks; so tort victims cannot tap this income as a source of compensation. Imperfect solutions include compulsory insurance, ecc.. A negligence rule allows a firm to escape liability by conforming to the legal standard of care. A rule of strict liability only allows a firm to escape liability by insolvency. Ligation Costs The final core assumption of the economic theory of tort liability was that litigation is costless. Of course, nothing could be further from the truth: litigation is expensive and sometimes ruinously so. Costly litigation will have different effects on potential victims and potential injurers. Consider, first, the impact of costly litigation on potential victims. If victims must incur a cost to assert their claims for compensation, then they may assert fewer claims. However, costly litigation may have a contrary effect on the decisions of potential injurers. If it is expensive for an injurer to litigate, then it may make sense to take more precaution than would be the case if litigation were costless. By taking more precaution, the potential injurer makes an accident less likely or less severe; if the cost of this additional precaution is less than the cost of litigation, then we should except potential injurers to take additional precaution when litigation is costly. Because the effects of cost litigation pull in different directions, we cannot be sure of the net effect of relaxing the assumptions of costless litigation. Vicarious Liability In this section we shall show how the economic theory applies to certain special cases. There are circumstances in which one person may be held responsible for the torts committed by another. The third party is said to be vicariously liable for the tortfeasor s acts. Vicarious liability may extend from an agent to his or her principal or from dependent child to a parent, but by far the most common instance of vicarious liability is that of employers responsibility for the tortuous wrongs of their employees under the doctrine of respondeat superior. The rule creates an incentive for the employer to take care in selecting employees, in assigning them various tasks, and in deciding with which tools to equip them. This is efficient if it is the case that employers are better placed than are employees to make these decisions. Joint and Several Liability With and Without Contribution When several parties cause harm to someone, a question arises concerning who the victim can sue and how damages should be allocated among them. Defendants are said to be jointly and severally liable if each of them is liable for all the victim s full losses, not just a portion of them. The plaintiff may proceed jointly against all his injurers or may elect

4 to recover all damages from only some of them or only one of them. The common law recognized two circumstances in which joint and several liability would hold:(1)if the defendants acted together to cause the victim s harm, or(2) if the victim s harm was indivisible. The most generous law for the plaintiff is several liability with no contribution, which allows the plaintiff to sue each of the injurers separately and recover full compensation from each of them. The least generous law for the plaintiff is joint liability with contribution, which requires the plaintiff to sue all the injurers together and limits the total recovery to the actual harm. There are several economic reasons for joint and several liability. One is that it relieves the victim of the potentially high costs of proving who caused her harm. Another economic reason for joint and several liability is that makes the victim s recovery more certain by allowing him to get to what is called a deep pocket. Another economic issue concerns contribution and efficiency. The no-contribution rule makes all defendants internalize the cost of accidents, thus creating incentives for optimal precaution by each of them. In contrast, the rule of contribution causes each defendant to internalize part of the cost of accidents and to externalize part of the cost. Because costs are partly externalized, the rule of no contribution does not create incentives for optimal precaution by each defendant. Although the rule of no contribution creates efficient incentives for precaution by joint injurers, the possibility of multiple recoveries can change reluctant victims into eager victims. Evidentiary Uncertainty and Comparative Negligence There are several forms of the negligence rule: simple negligence, negligence with contributory negligence, and comparative negligence. In this section we shall explain briefly how the comparative negligence rule works and how it differs from the rule of negligence with contributory negligence. Then we shall show how something called evidentiary uncertainty can give rise to an efficiency argument for comparative negligence. The simple reason for the rise of comparative negligence is an increasing dissatisfaction with the rule of contributory negligence. Recall that a contributorily negligent plaintiff could not recover anything from the defendant, even from a negligent defendant. This rule struck most people as exceedingly harsh. The principal difference between comparative negligence and the rule of negligence with contributory negligence is that under comparative negligence the plaintiff s contributory fault is a partial but not a complete bar to recovery from a negligent defendant. Thus, under comparative negligence the negligent injurer usually owes something, but not full compensation, to the negligent victim. The equitable argument is the principal justification for the switch to comparative negligence. ANTONELLA FERNANDA SESTITO Computing Damages The ability of liability rules to induce efficient precaution depends in part of the court to award truly compensatory damages to the victims of a tort. These damages accomplish two things at once: first, they put the victim back onto the utility level or indifference curve occupied before the tortuous act, and second, they are price that the injurer must pay for having harmed the victim. In this section we elaborate the ways in which microeconomics can help to determine the appropriate amount of damages.

5 Risk Equivalence Compensatory damages are intended to make the victim whole. In some circumstances, this is impossible. There are, in fact, two distinct concepts of compensatory damages in tort law. One concept is the standard economic concept of indifference and the riskequivalent method. The first method is appropriate for market goods; the second method is appropriate when there are legal and moral barriers to such markets. In general, demand for a good by an individual, is a function of many variables, including price, income, and tastes. The demand curve picks out one of these variables, specifically price, and depicts its relationship to the quantity of the good demanded. The other variables are implicitly held constant while the price varies. The variables held constant are the prices of other goods, the income of the buyers, and the tastes of the buyers. When the price falls, consumers move down the demand curve. The fact than consumers can obtain the good at a lower price implies that their utility has increased. Punitive Damages We must begin our economic analysis of punitive damages by answering The punitive damages, by definition, given to the plaintiff as a way of punishing the two questions: 1)Under what conditions are punitive damages awarded? 2)How is the amount of punitive damages computed? According to the usual formulation, punitive damages can be awarded when the defendant s behavior is malicious, oppressive, gross, willful and wanton, or fraudulent. There is much uncertainty about when punitive damages can be awarded. There is even more uncertainty concerning how to compute punitive damages. Products Liability It has become a large and important specialty. The liability standard in product-related accidents is called strict products liability. For a defendant-manufacturer to be held liable under this standard, the product must be determined to be defective. A defect can take three forms: 1 a defect in design; 2 a defect in manufacture; 3 a defect in warning. What liability standard would economic theory recommend for product-related accidents? If it is bilateral then a form of the negligence rule is the appropriate standard. If precaution is unilateral then strict liability is the appropriate liability standard. The more efficient standard would seem to be strict liability because in most instances of product-related harms precaution lies unilaterally whit the manufacturers. Products-liability law can steer a middle course between the view that precaution in unilateral and the view that precaution is bilateral. The conclusion we draw is that strict liability with the defenses of assumption of the risk and product misuse is an efficient standard for minimizing the social costs of product-related injuries.

6 Two theories of the evolution of products-liability law. Products-liability law first evolved in the United States from contract principles to tort; and then from negligence to strict liability. Some scholars believe that in recently evolved to enterprise liability, which means that manufactures are absolutely liable for accidents arising from use of their products. This theory is based on three main points: 1 manufacturers possess market power; 2 manufacturers are better placed than are consumers to spread the losses from productrelated injuries; and 3 manufacturers are better placed than are consumers to minimize the losses from product accidents by taking precaution and improving technology. Landes e Posner stress that the broad trends in products-liability law over the last century are economically sound. The change in the doctrinal basis of the law of product-related injuries may be explained, they contend, by changing underlying economic variables. Landes e Posner hypothesized that the year in which a state s courts moved from contract to tort principles for determining liability in product-related harms was a function of the rate of urbanization in the state. Medical Malpractice The argument that the medical-malpractice system in the United States is not performing well rests on three relates pieces of evidence: (1) the increase in the frequency and size of malpractice claims brought against physicians; (2) the resultant increase in the value of medical-practice insurance premiums paid by physicians; (3) the increase in the healthcare costs attributable to these first two facts. Put succinctly, physicians are ten times more likely to be sued for malpractice today than they were in The amounts paid on successful claims against physicians rose sharply from the 1960s to the 1980s. These rapid increase in the frequency and size of malpractice claims have caused a dramatic rise in the amount spent by physicians on liability insurance. The rapid increase in the frequency and size of awards in medical-practice cases, and the consequent increase in the amount of liability purchased by physicians, have contributed significantly to the increase in the costs of health care. Reform should seek to make malpractice claims more difficult to assert and to limit the discretion of juries. LUIGI GRANDE