Working Paper: NBER ID: w3634
Authors: A. Mitchell Polinsky; Yeonkoo Che
Abstract: A "decoupled" liability system is one in which the award to the plaintiff differs from the payment by the defendant. The optimal system of decoupling makes the defendant's payment as high as possible. Such a policy allows the award to the plaintiff to be lowered, thereby reducing the plaintiff's incentive to sue -- and hence litigation costs -- without sacrificing the defendant's incentive to exercise care. The optimal award to the plaintiff may be less than or greater than the optimal payment by the defendant. The possibility of an out-of-court settlement does not qualitatively affect these results. If the settlement can be monitored, it may be desirable to decouple it as well.
Keywords: Liability; Litigation; Incentives; Care; Decoupling
JEL Codes: K13; K41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| defendant's payment (K41) | plaintiff's incentive to sue (K41) |
| plaintiff's incentive to sue (K41) | litigation costs (K41) |
| defendant's payment (K41) | litigation costs (K41) |
| defendant's payment (K41) | level of care (I11) |
| plaintiff's award (K41) | litigation costs (K41) |
| optimal defendant's payment (K13) | plaintiff's award (K41) |