Working Paper: NBER ID: w1834
Authors: A. Mitchell Polinsky; Daniel L. Rubinfeld
Abstract: One of the principal results in the economic theory of liability is that, assuming litigation is costless, the rule of strict liability with compensatory damages leads the injurer to choose the socially appropriate level of care. This paper reexamines this result when litigation is costly. It is shown that strict liability with compensatory damages generally leads to a socially inappropriate level of care and to excessive litigation costs. Social welfare can be increased by adjusting compensatory damages upward or downward, with the desired direction depending on the effect of changes in the level of liability on the injurer's decision to take care and on the victim's decision to bring suit.
Keywords: litigation costs; strict liability; compensatory damages; social welfare; negligence rule
JEL Codes: K13; K41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| litigation costs (K41) | injurer's level of care (K13) |
| compensatory damages (M52) | injurer's level of care (K13) |
| injurer's level of care (K13) | social welfare (I38) |
| compensatory damages (M52) | social welfare (I38) |
| litigation costs (K41) | social welfare (I38) |